Forex trading is a lucrative market of possibilities and growth. If you have the right skills and knowledge base, becoming a successful trader is not so challenging. However, the market is inherently risky, making it difficult to know what to expect and what not to expect.
Therefore, before getting into trading, having an understanding of your goals is important. If you know your target per trade, you will save time and not take any risk that either leads to losses or puts your entire trading account at risk. Profit targets are designed only for this purpose. For each trade, you set an amount you wish to earn.
Once it reaches your desired profit, your trade will automatically close. However, setting a profit target doesn’t seem as simple as it sounds. There are a few things that you need to consider for setting an achievable target. In this article, we will discuss some ways that can help you achieve your targets and increase your trading account balance.
1. Choose The Number of Trades:
Each forex trader aims to execute a fixed number of trades each day. Based on this, you can set your target. Setting targets can benefit traders who prefer a structured approach to their trading activities. Define specific targets and trade accordingly. If you have a number set in your mind regarding the profits you intend to make in a single trading day, then you will never overtrade. These numbers are accurately calculated with the help of a trading calculator, where you can calculate margin requirements, pips and profits in your own currency, and so much more. Traders can quantify their success and set clear expectations for the number of trades they intend to take within a given period. This approach can benefit traders with disciplined plans and a well-defined strategy.
On the other hand, some traders may prefer a more adaptive and fluid approach to their trading. This will allow them to capitalise on various market opportunities without feeling restricted by predefined targets. They rely on their ability to read market conditions and make on-the-spot decisions based on real-time analysis.
2. Set Stop Losses and Profit Targets:
Setting stop losses and profit targets are two of the key concepts for managing the risk in forex trading. Stop losses protect traders from significant losses if the market moves against their positions. Stop losses close the trade automatically if the price reaches the stop loss level you set.
Profit targets, on the other hand, allow traders to exit trades at predetermined levels to secure profits before potential reversals. Using stop-loss and profit targets is beneficial for traders who cannot constantly monitor the market. It adds a layer of automation and discipline to their trading strategy. Although you can perform this manually, it could take time, and it is easier to lose sight of your goals.
Here are some tips and tricks for using stop-losses and profit targets:
- Trailing Stop-Loss with Volatility Bands: Instead of using a fixed stop-loss level, you should use a trailing stop-loss that moves dynamically with market volatility. Furthermore, traders who use volatility bands, such as Bollinger Bands, can adjust the stop-loss based on price fluctuations. This gives traders more room to breathe while protecting profits when the market turns against them.
- Fibonacci Extension Targets
Incorporate Fibonacci extension levels to identify potential target-profit areas. These levels are derived from key price points and can act as significant support and resistance zones. Placing target-profit levels at these Fibonacci extensions provides a structured approach to booking profits and helps you stay disciplined in your trading decisions.
- Multiple Time Frame Analysis for Stop Placement:
It’s always a good strategy to cross-check everything before placing your trade. Avoid relying solely on the chart’s current time frame. Perform multiple time-frame analyses to determine where to place your stop-loss. Combining information from higher and lower time frames can offer a more comprehensive view of support and resistance levels, leading to better stop-loss placement.
- Volatility-adjusted position sizing
Consider adjusting your position size based on market volatility. During periods of high volatility, reduce your position size to protect against huge potential losses. Conversely, increase your position size during periods of low volatility to capitalise on potential breakouts.
- Stop-Loss Triggers from Other Indicators
You can combine technical indicators to trigger your stop-loss. For example, if you’re using a moving average crossover strategy, consider placing your stop-loss below a significant moving average or a trendline to add an extra layer of confirmation before exiting a trade. All major trading platforms offer a wide range of technical indicators, MT4 has around 30 indicators, whereas its successor, MT5, has around 40 indicators. The MT5 trading platform has various other useful features that will help you trade smartly.
- Two-Stage Target Profits
A better way to implement stop losses is via a two-stage target-profit approach. The first target could be set at a conservative level to secure initial gains, while the second target aims for a more ambitious profit potential. This technique allows you to lock in profits early while giving you a chance to capitalise on significant price movements.
- Event-Based Trailing Stop-Loss
You can use news and event-based triggers to adjust your trailing stop-loss. Market-moving events can significantly impact price trends. If you adapt your stop-loss accordingly, it can help you ride the momentum while safeguarding profits.
- Psychological Stop-Loss
Even though setting a psychological stop-loss is an effective tool, it’s always best to set it. This involves determining a point at which you admit being wrong about a trade, regardless of the technical setup. This helps prevent emotional biases from leading to disastrous decisions.
3. Pips per day, week, or month:
For some traders, setting specific pip targets per day, week, or month can motivate them and help maintain consistency in their trading activities. Achieving these targets can boost confidence and provide a sense of accomplishment.
However, focusing only on pip targets can lead to over-trading or taking excessive risks to reach these goals. Thus, you must maintain balance and set achievable targets while adhering to all risk management practices.
4. Risk per Trade:
When using targets, a trader should know how much risk they should take per trade. This approach helps you get a clearer picture, and you can avoid taking on more risk than you can afford. It protects traders from significant drawdowns and preserves their capital for future opportunities.
Here are a few things that you can do to set your risk per trade:
- Set a Fixed Percentage Risk:
Do not take risks based on your mood or feelings. A trader should risk only a small percentage of their trades so they can have realistic goals. Moreover, setting a small percentage of risk helps traders avoid unnecessary losses or overtrading.
- Adjust Position Size
Calculate the position size based on the stop-loss distance and the fixed percentage risk. Adjust your position size for each trade to align with the specific stop-loss level, as this will ensure consistent risk-sharing regardless of the market volatility.
- Consider Account Size Changes
Regularly reassess and adjust your fixed percentage risk as your trading account grows or shrinks. If your account balance increases, you can afford to take slightly higher risks per trade, but if it decreases, lower your risk accordingly to protect your remaining capital.
- Reward-to-Risk Ratio
Assess the potential reward-to-risk ratio of each trade. Ensure that your profit target is realistic and aligns with the risk you are taking. Trades with a favourable reward-to-risk ratio offer a better chance of overall profitability.
- Avoid Revenge trading.
Losses are common when you are trading. But what you make out to them sets your trading journey in a whole new direction. After experiencing a losing trade, avoid the urge to increase risk on the next trade to recoup losses quickly. Emotional decisions can lead to impulsive actions and compound losses further.
5. Trading Particular Currency Pairs:
The use of targets may vary based on the currency pairs a trader prefers to trade. Different currency pairs exhibit unique characteristics. Therefore, traders may adjust their targets accordingly. For highly volatile pairs, wider stop losses and profit targets might be required to account for the market’s price swings.
Also, take the risk of trading a particular currency pair into account. Some forex currency pairs are more stable than others, while others carry bigger risks. Therefore, choose your currency pairs after considering their risks.
Whether you should use targets in forex trading depends on your individual trading style, risk tolerance, and overall trading objectives. In this article, we have discussed effective ways to incorporate profit targets in trades. Targets can add structure and discipline to your trading plan, which can help you set clear goals and expectations. On the other hand, a more flexible approach can allow for adaptation to ever-changing market conditions.
The key is to strike a balance between having targets and following risk management practices. Combine your trading strategy with a sound risk management plan to enhance your chances of success. Ultimately, the decision to use targets should align with your personality and trading preferences to achieve consistent profitability in the forex market.