At various occasions, while I was trying to trade profitably, Forex trading became very frustrating. One of the reasons why that happened was that many of my trades would move into a profit area to then reverse and hit my stop loss. That's hard to take as a new trader, but I had no trade management strategy…
After gaining experience in trading, you realize that the key, in reality, isn't to find the best signal. The key is to know how to manage an open trade. You need to have a trade management strategy, which I didn't have for a long time.
A Simple Trade Management Strategy…
Then, I came across Kathy Lien's book The Little Book of Currency Trading: How to Make Big Profits in the World of Forex. In that book, she shares a very simple way to manage your trades to maximize the gains of trades before they turn into losers. We could call that the T1/T2 Approach (a trade management strategy) and I've made a 3-step process out if it:
1) Open two positions when taking your trade
The basic idea behind the T1/T2 Approach as a trade management strategy is to open two positions with each trade. The first position will be taking profit earlier than the second one. It's that simple.
Now it all starts by opening two positions once you are ready to enter a trade. You do not need to double the number of units you trade. Instead, divide your usual position by 2 and take two smaller positions. For instance, if you usually trade 10,000 units of a certain currency, you would open two positions of 5,000 units each.
You will place the stop loss for each position at the same price level you usually place it.
The main difference will be in your take profits. The first one will be placed at a Risk-to-Reward of 1:1. That means if your stop loss is at 50 pips from the entry price, you will place your first take profit 50 pips away from the entry price in the opposite direction.
The second take profit will be at a Risk-to-Reward of 1:2. In other words, you will double the distance between your entry price and your stop loss and set that distance as your take profit.
2) Take profit and move your stop
If you've taken a signal that respected your strategy, there's a good chance that the price of the currency will move in your favor. Do not change your trade still. Wait until your first (low) take profit level (T1) gets hit.
At that point, 1/2 of your trade profit will be secured. There's no risk anymore for that position of the trade.
The next thing you will do is to move your stop loss at break-even (the entry price). Doing that will totally cut the risk on your second position.
3) Take the rest of your profit and exit the trade completely
Once T1 has been hit and you've moved your stop loss, two scenarios could happen.
In the worst case, the price would hit your new stop loss (at break-even). If that happens, you won't lose anything for the second position and you'll keep the profit of your first position.
In the best case, the price would hit your second take profit (T2) and you would get the locked-in profit from the first position as well as the larger profit from the second position.
Whatever happens, you win. That's fantastic!
The key to this trade management strategy is to not forget moving your stop loss. Everything else it automated. Another thing to note: whatever the outcome of the trade, accept it and move on. Do not re-enter your trade once your stop loss or second take profit has been hit.
Now, I want to know what is your trade management strategy. Have you heard of the T1/T2 Approach before? If not, what do you do? Leave a comment below!