Step 1: Measure your risk-to-reward ratio and set your limits
(A) The first line to be drawn in the sand is the point at which you would leave your position if the market goes against you. Here you will place your stop loss.
(B) Calculate the number of pips that your stop is away from your entry point. If the stop is 20 pips away from the entry point and you trade with a standard lot, then each pip is worth about ’10 (if the US dollar is your quote currency). Use a pip calculator when trading cross-currency to easily determine the value of a pip.
(C) Calculate the percentage that your stop loss would be as a percentage of your trading capital. For example, if you have a .000 in your trading account, 2% would be $20. Make sure your stop-loss is no more than $20 from your entry point. If 20 pips are adequate to $200, then you’re too leveraged for your available trading capital. To overcome this, you need to reduce your trade size from a standard lot to a mini lot. A pip in a mini-lot is approximately .1. Therefore, in order to maintain your risk of 2% of the capital, the maximum loss should be ’20, which requires that you only trade with a mini-lot. (For more information about minis, see Forex Minis Shrinking Risk Engagement).
(D) Now draw a line on your chart where you want to make a profit. Make sure it is at least 40 pips away from your entry point. This gives you a win-loss ratio of 2:1. Since you can’t know for sure whether the market will reach this point, make sure you set your stop to break-even as soon as the market moves beyond your entry point. In the worst case, you scratch your trade and all your capital remains intact.
(E) If you faint on your first attempt, do not despair. Often it is your second entry which will be right.
. It is true that “the second mouse gets the cheese”. Often the market will bounce off your support when you buy, or withdraw from your resistance when you sell, and you will enter the trade to test this level to see if the market responds again to your support or your resistance. You can then win the second time.