We all know the importance of protecting our profit! One of the ways is to use a moving sop loss.
Bas^aHy it is a smpe process, in that when trading becomes profitable one moves the sop loss, thereby reducing one's initial rsk. What one must do is to move the sop loss as a profit protection method. Naturally one's eventual goal is with a moving sop is to move it to a plus posttion and lock in the profit.
Perhaps rather than just talking about how to use a moving sop loss, let's look at an exampe that incorporates the Rsk Reward principle and which has been covered eartier. The advantage of trading in this way is that if one uses the foil owing techniques diligently, one's chances of success have increased sgnificantly.
7 Winners X 70 pips 7 Losers X 35 pps 3 Winners X 10 pps 3 Losers X 25 pps
TOTAL NET PIPS
• Establish maximum exposure
• Always enter a sop loss
• Maintain proper rsk reward ratios
Let us say that the Stop Loss is 40 pips with 1: 2 risk reward ratio. In other words we are risking 40 pips to make at least 80 pips. Note the target profit must be at least 80 pips.
• When the market moves 10 pips in your favour, move the Sop Loss 10 pips. Your Sop Loss will now be reduced to 30 pips.
• Continue reducing the Sop Loss each time the market moves another 10 pips in your favour. Your sop can eventually be moved to your entry point and give you a "free" trade.
• When the market reaches 75% of your original target for profit, begin progressively tightening the distance of your sop from the current market price.
• If there is no sgn of a market reversal, take off your limit order and continue to use the moving sop technique to protect profits and ride the trend.
• If there is strong evidence of a market reversal, dose your posftion with a market order and consíder opening a new posftion going in the new direction. We will need plenty of practice to do this live, however we know that after big rallies there is always a consolidation, which is basically a retracement to a fit) line.
To overcome, as discussed before, one needs to have a sop that does not follow the market too closely. The noise or whipping action in the market can be 20 - 30 pips or more and will take out sops that are too small. It is suggested that sops should be at least 35 to 40 points in most cases, especially in the early part of a trade. However, the best posftion for Sops is above points of resistance and below points of support.
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