Once you have a trading plan that uses a proper risk-reward ratio, the next challenge is to stick to the plan. Consider the coin flip wager. The tendency is to hold onto losses and take profits early. This is not the best strategy for proper risk management.
Instead traders should remove emotions from trading. A good way to do this is to set up your trade with stop and limit orders from the beginning. This allows you to use the proper risk-reward ratio (1:1 or higher) from the outset, and to stick to it.
Once you set stops and limits, don't touch them!
DOES 1:1 OR HIGHER REALLY WORK? OUR DATA CERTAINLY SUGGEST IT DOES
Of the traders who traded 1:1 or higher risk-reward, 53% turned a profit; of those who didn't, 17% turned a profit. Traders who adhered to this rule were three times more likely to turn a profit—a substantial difference.
Open nearly any book on trading and the advice is the same: Cut your losses early and let your profit run. When your trade goes against you, close it out—better to take a small loss early than a big loss later.
GAME PLAN: USE STOPS AND LIMITS SET TO A RISK-REWARD RATIO OF 1:1 OR HIGHER.
When you place a trade, use a stop-loss order. Aim for at least 1:1 regardless of strategy. The actual distance you place your stops and limits depends on market conditions, such as volatility, currency pair and where you see support and resistance.
Easily calculate your trade size with stops and limits using the Risk Management Indicator from BlueSuisse Apps.