Many traders have the technical know-how and a profitable trading system. They diligently select trades that meet their criteria, yet they still struggle to make money. Why?
The Real Issues: Understanding Risk and Managing Greed
Misunderstanding Risk : Most traders believe their risk is limited to the maximum loss if a trade hits the stop loss, plus trading costs like slippage, brokerage, fees, and taxes. This isn't entirely true. When a trade moves in your favor, your risk includes unrealized profits. Effective risk management should also protect these unrealized gains, which we call Profit Management.
Greed : Once a trade moves in their favour, traders often become complacent. Greed kicks in, and they want to squeeze every last bit of profit from the trade. The market can then turn, wiping out all profits and potentially turning a winning trade into a losing one. Does this sound familiar?
Our Profit Management Strategy
We recommend trading with a minimum of three mini lots (25 units per lot) with different profit targets:
First Lot: Target low enough to cover costs and take some profit home.
Second Lot: Target for a modest run in the market.
Third Lot: No target; carried till End of Day (EOD) at 3:25 PM to benefit from a trending price move.
The stop loss on the third lot is moved to breakeven once profits on the first two lots are booked.
The table below provides the profit targets by setup by lot, assuming a position size of 3 mini lots, arrived at through extensive backtesting. Only those setups have been included that have a high Win Ratio.
Setup (S) | Profit Target (points) | Estimated Profit (INR)# | SL (points) | Max Loss (INR) | Win Ratio (%) |
Bearish S1 - Bearish Engulfing | L1 - 60 L2 - 120 L3 - EOD | 7,500 | 50 | 3,750 | 76% |
Bearish S2 - Reverse Hammer at Resistance | L1 - 60 L2 - 120 L3 - EOD | 7,500 | 50 | 3.750 | 76% |
Bearish S4 - Triple Rising Top | L1 - 60 L2 - 120 L3 - EOD | 7,500 | 50 | 3,750 | 100% |
Bearish S6 - Strong Red on C1 with High above Resistance | L1 - 80 L2 - 120 L3 - EOD | 8,000 | 80 | 6,000 | 87% |
Bullish S1 - Bullish Engulfing | L1 - 80 L2 - 120 L3 - EOD | 8,000 | 80 | 6,000 | 78% |
Bullish S2 - Hammer at Support | L1 - 60 L2 - 120 L3 - EOD | 7,500 | 50 | 3,750 | 91% |
Bullish S3 - Big Green above Resistance | L1 - 60 L2 - 120 L3 - EOD | 7,500 | 50 | 3,750 | 85% |
Bullish S4 - Triple Falling Bottom | L1 - 60 L2 - 120 L3 - EOD | 7,500 | 50 | 3,750 | 100% |
Bullish S5 - Big Green on C1 or C2 | L1 - 100 L2 - 150 L3 - EOD | 10,000 | 70 | 5,250 | 73% |
Bullish S6 - Strong Green on C1 with Low below Support | L1 - 80 L2 - 120 L3 - EOD | 8,000 | 80 | 6,000 | 80% |
(Table 1.1 - Profit Target by Setup by Lot for 3 lots)
#Estimated profit is calculated assuming that profit on the 3rd Lot carried till EOD is booked at the same rate as the 2nd lot. This is to average out any large profits booked when the market runs away with lower profits when the market retraces.
Profit Targets by Lot for position size exceeding 3 Lots : If you trade more lots commensurate with your Trading Capital, you can adjust the profit targets conservatively. For example:
4 Lots: L1, L2 - 60 points; L3 - 120 points; L4 - EOD
5 Lots: L1, L2 - 60 points; L3, L4 - 120 points; L5 - EOD
6 Lots: L1, L2 - 60 points; L3, L4 - 120 points; L5, L6 - EOD
7 Lots: L1, L2, L3 - 60 points; L4, L5 - 120 points; L6, L7 - EOD
Pay Yourself: The Key to Consistent Profits
This profit management strategy ensures you PAY YOURSELF for your efforts, central to making consistent money in the market. Trading courses, books, and videos teach you HOW TO TRADE but rarely focus on HOW TO MAKE MONEY WHILE TRADING. Learning this concept is crucial if you want to turn trading into a profitable venture.
Understanding and applying sound risk and profit management principles can make a significant difference in your trading success. Stay tuned for our next post on time-tested trading rules that complement these strategies.
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