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Putting on a profitable trade isn’t that hard. With a 50/50 chance of being right, the initial odds of coming out ahead are quite favorable.
What is difficult, however, is holding onto those profits.
How many times have you had a big winning trade only to give all your profits right back on the next one?
Sometimes, the losses you incur on the very next trade exceed the gains from the previous one.
It’s time to end this boom and bust cycle. If you want to build your account and become a consistently profitable Forex trader, you have to learn how to protect your profits.
That’s where today’s post comes in. By the time you finish reading this lesson, you will have a three-step process that you can implement to help protect your gains.
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This is obviously very subjective. What I consider to be a big win will likely be different from your interpretation.
It’s also important to use percentages when discussing this topic. After all, a $100 profit will seem much more significant to someone with a $500 account than to someone with a $10,000 account.
Every trade I take has a 3R potential. That means for every one pip at risk, I stand to gain three pips.
However, I also look for opportunities that allow for pyramiding. If all goes well, I will often make two or three entries along the way to the final target.
Even if I’m only risking 1% of my account balance per trade, that can often amount to a 5% to 10% profit. Again, this assumes that everything plays out according to plan.
For me, anything in that 5% to 10% range is considered a big win. It may not sound like much, but with a larger account size, even 5% amounts to a considerable sum of money.
The very first thing you should do following a big win is update your trading records.
Whether you use a paper journal, spreadsheet or a more sophisticated online journal, it’s imperative that you add your latest win as soon as possible.
This may seem a bit trivial at first. After all, why would it matter when you add the latest profit to your journal?
But here’s the thing…
Large profits can often occur quickly in this business. It isn’t that rare to make 5% to 10% within a week or less, even if you’re only risking 1% to 2% of your account balance.
It can also seem too easy in some cases. We’ve all had those trades that we put on and then take off for a massive profit in disbelief that it went so smoothly.
By documenting what just happened, it helps solidify the win. It gives some meaning to the intangible event that just occurred.
It’s no longer something that just happened, but rather a trade that you put on because of specific criteria.
Documenting the win right away will also help convince you that those gains are now yours.
How often have you earned a significant profit only to give it right back on the next trade?
One reason that happens is because of something called the “house money effect”. More on this in the next section.
This is perhaps the most overlooked step in this process.
After a big win, most traders want to put that freshly minted capital to work. So instead of taking some time off, they jump right back in another trade.
A common justification for this behavior is that the trader is now using “house money”.
The house money effect is the tendency for a trader to take more and greater risk when using trading profits.
Let’s assume for a moment that you have a $10,000 account. You just exited a trade and earned a profit of 10% or $1,000. This brings your new account balance to $11,000.
The house money effect states that you are now prone to taking on more risk.
From your perspective, you just found $1,000. Also, since you just earned it a few minutes ago, it still feels like disposable capital.
Said differently, you haven’t accepted the $1,000 as part of your new account balance.
If you’ve been in this situation before, I’ll bet you know what happens next. Most likely you will put on a new trade immediately only to see it go the wrong way.
Even if you do win the next one or two trades, the inevitable losing position that wipes out all recent gains is just around the corner.
So how can taking a break from trading help solidify those gains?
Simply put, a break will allow your emotions to settle.
We’re all human. No trader is void of emotions. In fact, it’s more important to listen to your emotions while trading rather than to suppress them.
By taking a break, you have time to collect your thoughts and process any lingering emotions from your big win.
How long to make your break is up to you. It could be as short as a day or as long as a week, or even two.
Personally, I like to avoid placing new trades for at least 24 hours after a big win. If it’s a considerable enough amount, I won’t even look for new opportunities for two or three days.
It’s not always easy to take breaks. As traders, we feel it’s our job to trade.
However, anyone can place a trade. There’s no skill in that.
Therefore, we can say that a trader’s job isn’t just to trade, but rather knowing when not to trade. That’s what will separate you from the pack.
At this point you’ve updated your records and have taken a break from trading. Once you feel that you’re ready, it’s time to get back to business.
Now, instead of just charging back in with full-sized positions, you should consider cutting your size in half.
If there are any lingering emotions from your last win, you’d rather they affect a smaller position size, right?
I’ll be honest, though. This is not something I always practice. In fact, it’s quite rare that I use half-sized positions after a big win.
However, years ago this technique was incredibly helpful. It’s also much more useful if you aren’t taking a break from trading like I discussed in step two.
Although this step is optional, you should seriously consider reducing your position size after a considerable win. This is especially true if you are still struggling with controlling your emotions.
One of the most costly mistakes I see traders make is thinking that they’re trading with house money after a big win. That type of mentality keeps the boom-bust cycle going, and prevents the trader from growing their account.
The very first thing you should do following a big win is to update your trading records. Whether you use a notepad, spreadsheet or an online database, it’s important to update those records immediately to help solidify your recent profit.
You should also consider taking a break from trading. It could be as short as a day or as long as a week, but some sort of hiatus can go a long way. The last thing you want to do is give back those profits due to a feeling of overconfidence from your big win.
Once you’re ready to trade again, consider cutting your usual position size in half. This is especially true if your break is 24 hours or less. By reducing your position size, you can further protect yourself from the overconfidence that may stem from your latest gains.