Holding your trades

Are you one of the many traders that are struggling with the decision of holding your trades for the long term vs setting a take profit or to a lesser extent setting a bigger take profit vs setting a smaller one? 

If so then this blog post is for you as we set to dive deeper into the pros and cons of each decision to help you decide which is best for you so you may optimize your trading strategy.

Before we can get to a conclusion; let’s look at each individually first start with the associated benefits of holding your trades for the long term.

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Letting your trade run

“Hold or not to hold,” that is the question. Since started trading, you would hear and/ or read many coach/ teacher or advisor (or whatever you want to call them) say that you should “let your winners run.”

If you haven’t then let me enlighten you, doing that is way easier said than done. One of the many reasons is because the market is not as faithful you would want it to be.

Speaking from experience, holding a trade for the long term can be mentally frustrating, especially if your account balance needs growth after a few bad trades.

Yes holding the trade to let get run deeper into profit is the ideal thing to do, but can you imagine the mental frustration and disappointment you would feel after days of having the utmost faith in this one trade, only for it to reverse on you?

If you are wise and were managing the trade, then it might close at breakeven, or close in profit. However, there will be trades that won’t be so favorable, to be specific trades that will go into profit with the impression of no turning back, only to reverse suddenly to hit your stop loss then after.

 

The disadvantages of holding your trades

  1. It is not sure when the market will push in your favor for a bigger profit.
  2. Requires a lot of patience and discipline
  3. After days of holding, the market can reverse suddenly and hit your stop loss.
  4. No specific time of how long you should hold the trade.

While on the other hand;

 

Advantages of holding your trades

  1. Increases your discipline
  2. Can greatly Recover losses made in the past*
  3. Can reap a greater reward for holding the trades

 

Should you be holding your trades

Though the amount of disadvantages listed is more than that of the advantage, #2 on the advantage list is enough to outweigh the disadvantage. After all, forex trading is all about making money to begin with.

Though holding your trade and letting it run in profit can be beneficial in terms of account growth, it is a lot harder than it appears, especially for first-time traders that are a bit emotional.

As such, it begs the question, “why not use a smaller take profit?”

It is an undeniable fact that the smaller the take profit is, the greater the likelihood of it being hit, but many forex gurus always state that your take profit must always be at least two times (2x) the size of your stop loss. In this case, one win can recover two losses.

 

Advantages of using a take profit

  1. Trade will be closed automatically without your intervention or the need for your PC to be on.
  2. Using a decent risk-reward ratio, at least 1:2 can recover losses made

 

Disadvantages of using take profit

  1. Can causes your trade to close too early and make you miss a lot of potential profit.
  2. Since stop loss is smaller, it has a higher probability of being hit than your take profit.
  3. The open trade can go mid-way or very close to your take profit then suddenly reverse.

 

Should you use a take profit?

With that in mind, it clear that a smaller take profit has a higher probability of being hit and can be the better choice among the two to set a decent take profit rather than holding your trade for an unreasonable amount of time.

While on that same note, since the smaller the take profit the greater the probability of being hit, what of a smaller take profit with a 2:1 risk-reward ratio instead of a 1:2?

ie: 2:1 Risk 2 to get a reward of 1.

I know many, including myself, said that it’s ideal to make your take profit at least 2x bigger than the stop loss, but that is not a must. 

In fact, a smaller take profit can prove to be more consistent than having a bigger take profit.

holding your trades
25 pips take profit; 50 pips stop loss

Though the picture above is my personal manual trading results, another perfect example would be expert advisors. Most expert advisors use a smaller take profit compared to that of a stop loss, especially the scalping EAs.

So the question is can you incorporate that into your strategy?

 

Can your take profit be smaller take than the stop loss?

Yes! Of course, you can. However, using a risk reward ratio of that nature requires you to have a higher win rate to be profitable.

In forex trading, there is nothing set in stone, every trader is there to make money, whether he is a noob or a professional, retail trader or trading for an organization, they are all here for one thing, and that is to make money. 

So with that in mind, if using a smaller take profit regardless of the size, proves to be more consistent, then that is the take profit that you should be using to set yourself apart from every other trader in terms of consistency and profitability.

All that one needs is a profitable forex trading strategy, and to a greater extent, one that complements holding your trades.

25 pips take profit
smaller take profit vs bigger stop loss

 

Dailypriceaction.com outline 3 effective ways on how to hold your trades which you can refer to for more information.

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