We know that most forex mentors out there say "Let your profits run and keep your losses small". Really??? Seriously??? How do they do that? Personally speaking, we have never figured it out. It usually works the opposite for us when we try that. Our profits stay small and our losses are large. Somehow most of those self-proclaimed forex teachers always seem to know just exactly which trades are going to run to massive profit because they rarely, if ever, talk about having large losses. But they sure like to brag about those big runners. Almost like those classic fish stories. How big was it???? The size of the fish grows in proportion to how many times the story has been told.
One of our first forex teachers back in 2005 used to show us examples of completed charts of trades that he had supposedly taken (we later learned that he never actually traded live at all!). He would brag about the pattern he had cognized that would run for 100's of pips, sometimes even 1000's of pips. But when it came to actually taking the trade, he would tell us to always take a fixed profit of 30 pips. That totally confused us because he had set up the expectation of his particular pattern yielding many more pips than that, so 30 pips seemed like it was never enough and we always felt like we were leaving pips on the table. He left us so frustrated that it was years before we could circle back and see that the idea held merit.
Mark Douglas, the author of the must-read book for all forex traders, Trading In The Zone talks about the fourth primary trading fear: Leaving money on the table. Douglas says:
"When we leave money on the table, we can't blame the market…in other words, there's no way to rationalize the pain away. Believe it or not, of all the skills one needs to learn to be a consistently successful trader, learning to take profits is probably the most difficult to master. A multitude of personal, often very complicated psychological factors, as well as the effectiveness of one's market analysis, enter into the equation. I point this out so that those of you who might be inclined to beat yourselves up for leaving money on the table can relax and give yourselves a break."
Now years later, we always trade using a fixed take profit, which means that we pick a set number of pips for our profit. And yes, oftentimes the trade does keep running after we've exited, and other times we see that we got out with our profit, sometimes in the middle of the swing and sometimes precisely at the end of the swing. And yes, of course there are plenty of other times when we get stopped out, just like everyone else.
So why do we use a fixed take profit? Here are our top 7 reasons:
1. It takes the emotion out of our trading. The trade either works or it doesn't.
2. We're more at ease because we no longer nervously sit in front of the computers with our finger on the trigger ready to pull the trade. By this point we understand that we don't have a magic crystal ball to know what price is going to do. In the past we became so frustrated by pulling a trade that was stalling only to find that it would have hit our profit target had we left it alone. There's no way to know if the trade is just doing a retracement and will continue to trend in our direction or if that's all it's going to do and this is the place to pull it before it backs up on us and takes away all of our pips.
3. A fixed take profit limits our exposure in the market.
4. It reduces our onscreen time. We set our trade because we trust our strategy, our analysis and our entry and we leave it to work or not work. We don't micromanage it and obsess over it after we place it.
5. We've also seen that sometimes an early exit with a fixed take profit yields a second entry off of the retrace for an additional fixed profit yield.
6. We've done extensive testing and have logged all our trades in the Forex Smart Tools Log and have done careful analysis of various exit strategies, including volatility stops, trailing stops, support and resistance stops, fractal stops and many more. There are always some trades that can show brilliant results with one method over another but when we ran these tests over years of data, none of them proved any better than the simple fixed take profit. So at this point we have definitive proof for our own strategy of what works for us and what doesn't.
7. And best of all, we've recorded our own sound file that says "Ka Ching" every time we hit our profit target. And that's the sweetest sound! "Ka Ching". Click on the left edge of the mp3 ribbon you see here to listen now:
By the way… if you like these blog articles, please let us know. You can use the comment form below. Your comments inspire us to keep writing and sharing the fruits of our experience with you. Thanks!
Ahh - news flash! Since we wrote this post we've gotten some great comments - and even more fun… some of our Smart Tools users have sent us their own version of ka-ching too!
Here's one that Steve uses in his trading
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