How setting take profit limit orders when trading FX can improve traders’ options
Posted by Formax Prime on 27 August 2018
Most traders are familiar with stop loss orders and for those unsure of their features and benefits, at Formax we’ve recently published an article on the subject of stop losses, which is an ideal accompaniment to this article.
Many traders find it far easier to apply technical stops to protect against losses, then to apply technical limits to their profits. It’s a fascinating, counter intuitive and cognition issue, relating to trader psychology, which can be discussed in a later article. Part of the contrast traders experience; between using stop loss orders and take profit limit orders, relates to traders wanting to let their profits run, a phrase and concept that you can often read discussions of, on some of the most popular FX internet trading forums.
The problem with letting profits run involves perception; where are traders letting future potential profits run to? At what point do you decide to close the trade and what criteria have you based your judgment on, if you don’t have a set target in place, or in mind? Would you consider letting your losses run, so why let profits run, simply because you might perceive your chosen direction to be favourable?
Traders have no guarantees of where the momentum, or the trend will end, as it’s impossible to determine when the trend, or daily momentum will begin to lose impetus. This is why many experienced traders prefer to use take profit limit orders.
Traders have to remind themselves that part of a successful trading plan, involves executing an edge continually. Repeating that trading edge, involves closing trades when they’re in profit and when they’ve reached the target. All notions of what could have been, are irrelevant, if the trading plan is being executed.
It can be just as painful witnessing a profitable trading position give back all the gains, as it can be watching yourself closing out a trade in profit, to then witness the direction you predicted correctly, continue. Locking in profit, by way of limit orders, can therefore prove to be extremely valuable. Traders may have also come across the phrase “never let a winning trade turn into a loss”. This is why many traders will move stops to break even, in order to gain from what they then perceive to be a free trade; a trade only involving upside, as the risk of loss is now ended.
Daily FX traders are particularly biased towards the use of take profit orders, they may use indicators, such as; the average true range ATR, or the average daily range ADR, to establish a typical range over a specified period, or during the day, for a particular currency pair. This data can provide an idea of what represents a typical recent trading range, when measured over a specified period. From this information, traders can then determine what a typical range might be, for a currency pair to move in.
Hypothetically and historically, it’s worth considering what represents an average range for a currency to move in, on any given day. It’s also worth noting that in such a highly efficient market such as FX, the market ranges approximately 80% of the time and trends the other 20%. Therefore, we have to take on board that if we’re looking to capitalise on a daily trend move, such a move may only happen (on average) one trading day a week.