After having identified your trade entry price and your initial risk which if the difference between your entry and initial protective stop, many traders will also enter a limit order to take profits.
In the FX Power Courses, we normally recommend using a 1:2 risk:reward ratio to determine that exit level. If you are risking 50 pips on the trade, you should look for a minimum of 100 pips in potential profit. This way, if you are able to maintain close to a 50% win ratio on your trades, you can be consistently profitable. However, having the patience and discipline to wait for the market to reach that price level to take profits is much harder than it sounds.
If the market moves up towards the profit target and then reverses and moves back towards the entry price, many new traders will exit taking a small profit. While this sounds like a good move, in the long run this usually results in a good win percentage but no profits. The reason is that the trader will end up with bigger losing trades than winning trades.
How do we work around this?
The answer is normally to set your initial protective stop and limit order to take profits and then just the trades play out on their own. To keep you from losing on a trade that showed a decent profit at one point, the use of an automatic trailing stop can be of great value.
I recommend using a trailing stop the same size as your risk. Otherwise, if you are risking 50 pips and looking for a 100 pip gain, use a 50 pip automatic trailing stop.
This way your protective stop will move to the breakeven level when/if the market moves halfway to your target. Now one of two things can happen, you can break even or take the full profit. That is a good position to be in and a great way to play the FX markets 24 hours a day.
