Learn where to put target orders to maximize reward:risk when forex day trading. Stop losses I always put in the same place, but deciding where to get out of a profitable trade is a trickier endeavor for many people. My preferred method is to use a target. A target is a limit order, set at a particular price, that will close the position if that price is reached.
For forex day trading, I like setting a stop loss and a target at the outset of my trade. I know where I will be getting out with a loss if the price doesn’t do what I expect, and I know what my profit will be if the price does do what I want. Since I began trading in 2005, I have found the stop loss and target to be the best exit strategies when day trading.
The stop loss and target get you in and out with a known reward-to-risk. That means before the trade is even made we can assess if it is worthwhile or not. The trick is to base the risk and reward on what the market is actually likely to produce. I can say I will buy a stock at $1 and sell it at $100…but how likely is that to happen? Great reward:risk, but zero probability of that happening on a day trade.
The video below discusses how we can analyze price action to help us maximize our gains (target), while at the same time keeping the target within an area that is likely to get hit. We not only want to maximize profit/target, but we want to maximize the probability that the target will be hit.
The video below was recorded for a friend, but I decided to make it public since it has some good information on what to look for while day trading forex. The video was a response to questions related to How to Day Trade the Forex Market (EURUSD or GBP) In Two Hours or Less a Day. This person had also read my Forex Strategies Guide eBook, and was looking for ways to fine-tune the reward:risk on trades, and potentially make the reward:risk more favorable if conditions allowed.
As a default when day trading forex, after placing a stop loss in the correct location, a target can be placed at 1.5 or 1.6 times the risk. For example, if risking 5 pips on a trade (distance between entry and stop loss), then a target is placed 7.5 to 8 pips from the entry. I have found this guideline to be very effective. If picking decent trades, this method will produce very profitable results overall. But, there are definitely times when we can make a lot more than 1.6x our risk. The market may provide a trade setup where we are only risking 5 pips, but we can reasonably expect to make 15 pips–a 3:1 reward to risk. When such opportunities present themselves, it is in our best interest to take advantage. Sure, we could take our 8 pips (1.6:1) and be quite happy, but if we can reasonably make 15 (3:1), that is a better option. The video discusses how we make this distinction from trade to trade.
Ignore my personal comments to my friend about a particular trade, and starting to trade at 1800. The best times to trade, and when each of us starts trading, is affected by the time zone we are in. For day trading, I recommend trading any time during the London session or US overlap period. Once the overlap period ends (London closes) I don’t usually continue trading after that because volatility and trending moves typically die off.
I will redo this video in the next few weeks, making it more clear and with more examples.
Considerations for Placing Profit Targets
–The targets and stop losses we use each day will vary based on volatility. If the waves are bigger, our target is bigger. If the waves are smaller, our target is smaller. Our stop loss is always set below the recent low if going long or above the recent high if going short. Because our target and stop loss are based on different things, our reward:risk could fluctuate from trade to trade. We only take a trade if the price is likely to reach a target at least 1.6x our risk. If the waves are too small and choppy to reasonably do that (it hasn’t been doing it on past waves), then we don’t trade. Other times, the market may provide us with much bigger reward:risk trades. Notice that we are not actually setting our reward:risk, the market is. We just put in our orders to accommodate what the market is doing.
–I mention setting the stop loss at about half the target, or a bit less. I meant that as just a guideline of what we typically expect. A 1.6x reward:risk is not a number I picked out of the air. That is what I found the market typically gave me before it had a decent sized pullback….but not always. Set the stop loss as described in my courses and the articles mentioned earlier in this post. Then, measure the waves and set your target. Trade the reward:risk offered by the market, assuming the trade offers at least a 1.5:1 ratio or better.
–Zoom in or out on the 1-minute chart when day trading to get a bigger perspective, but don’t worry about looking at a 5-minute, 15-minute, or hourly chart. What you need to trade successfully each day is revealed on THAT day’s chart alone. For more tips, see My Tactical Day Trading Cheat Sheet.
–I am not saying that we would make a trade on each one of the waves I measured in the video. All I am doing is looking at how many pips most waves moved, at minimum, before a decent sized pullback. Then, when I do take a trade, I put my profit target a number of pips away from my entry that is likely to be hit on that particular day.
–Notice how long (time) waves take as well. This will help psychologically prepare you for how long your current may take. Once in trade, many new traders panic, wondering why the price hasn’t magically shot right to their target. In this panic, they make mistakes, such as bailing out of the trade for a very small profit or loss. Look at prior waves. If the last several waves took 10 minutes to move 15 pips, it will probably take at least 10 minutes to move another 15 pips now that you are in a trade. If it moves quicker, great. But really studying price waves will let you know how long of a wait you are likely in for before the price nears your target.
If you want to learn about day trading (or swing trading) successful, check out the Forex Strategies Guide for Day Swing Traders eBook.
300+ Pages and more than 20+ strategies combined with trading psychology and a proven 5 step method for becoming a winning trader.
by Cory Mitchell, CMT