Losses, Profits and Stop Losses

Everyone needs to understand that losses are a part and parcel of the trading game. There is no way that anyone can avoid it. No one can be 100% successful always. So we need to take losses in our stride and try to minimize them as much as possible.

Trading is a game of percentages. If your win percentage is 50%, you are not doing great. But just increase that percentage to 70% and you would be sitting on a huge amount of profits. You need not be successful 90% or 95% of the time. Just being successful 70% of the time would make you a hugely rich man. We need to learn that and also accept that. But we need to ensure that we are atleast 70% successful consistently and this is where choosing your supports and resistances comes into the picture.

Does knowing support and resistances always make you successful and guarantee that all your trades end up in profits? No..Not at all. The knowledge of supports and resistances and other tools of the trade increases your chances and your percentage of your successful. Thatll. When you start off trading, you have 0% chance of success. Maybe you have some luck on your side and so your chances increases to 10-20%. That might make you win trades initially but in the long run, you would end up a loser. As you learn more and more the tricks of the trade and improve your knowledge and strategies, you slowly increase your chances of success and only when you increase it to above 50% do you start earning profits on a consistent basis. That is why there is no one in this whole world who keeps winning in his trades right from day one till the end of his trading career. No one can keep winning always. We need to remember that. Our main aim is to increase our chances of success as close to 70% or 80% and not 100% cos you never can be 100% successful always.

Now lets move on to stop losses. Stop losses are something which no one ever seems to get it right. Its tough for any trader to deal with the stop loss. Which is the ideal SL for my trades? Is it 100 pips or 300 pips or what? No one has endless money to keep hanging on to losing trades forever. If we did, we would not be trading. That is why it is good to have enough money, have good money management so that your SL is big enough to handle your losses. There is no fixed SL for any currency pair or for any trades as such. Your SL should vary depending on the pair and also depending on the situation and how and where you have taken your trade.

Yesterday, I had talked about averaging. I had said that averaging should be done only in the direction of the trend. While the trend is still intact, you can extend your SL to the maximum extent that is possible for you. Lets take GBPJPY as an example. It is in an uptrend right now. Lets say that it has met with some resistance and so you have taken a short. Having a SL of 300 pips for your short when it is against the trend is foolish. So if you want to trade against the trend, have your SL at a safe place where you know that it is not going to come back. For GBPJPY, it can be 75-100 pips maximum.
On the other hand, if you know that you have taken a trade with the trend, you could afford to have a much bigger SL and also add to your losing trades as well for the purposes of averaging. Your SL can even be 300 pips for GBPJPY if you are sure that the trend is still intact while having the same SL for a trade against the trend would be foolish. So the SL will always vary with the currency pair and also the situation under which the trade is taken. This is why it is very important to understand whether a move against your trade is due to a change in trend or due to a retracement. How do we identify that? We will discuss this sometime soon.
Happy trading!!!
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