Learn professional closing methods from Dr. Iida and settlement theory to survive in the forex market | Episode 3: How to determine take-profit and stop-loss points
Profile of Goodatchi-sensei
Former instructor at a preparatory school. Loves hot springs and holds a hot spring sommelier qualification, a professional FX trader. He has trained many excellent traders using a method called "Closing Price Trading Method," and his online study sessions attract a wide range of participants from all over the country, from the elderly to the young. The chart analysis method that emphasizes the "closing price" is popular among part-time traders as a trading approach that does not require focusing on the 24-hour market.
Blog：The Big Comeback from Ten Thousand Yen! FX Trader Goodatchi BLOG
※This article is a reprint and editing of an article from FX攻略.com, August 2019 issue. Please note that the market information written herein differs from the current market.
Consider three scenarios to reduce risk
Hello, this is Goodatchi-sensei. In this issue as well, let’s continue writing about settlement theory. Last time I explained that it is not a binary choice between taking profits or stopping loss, but rather to introduce diversity and to formulate three scenarios before reaching a stop loss. If the stop-loss criterion is set as a ratio to your own funds, when that point is reached, you will decide to stop out, which narrows the options for exit plans to two and risks making the stop loss sloppy.
The relationship between money management theory and settlement theory
In trading, money management is said to be very important in many books, but there are few writings about the importance of settlement theory. However, this settlement theory is based on money management, so it cannot be neglected. To implement ideal money management, you need to drill down the settlement theory. Money management is ultimately a matter of outcome.
What is money management?
When you look into what money management is, it is usually described as “managing funds to keep the invested capital safe.” Specifically, ① understand and manage potential capital fluctuation, ② determine the stop-loss point, ③ determine the loss amount per stop-loss (as a ratio to the invested capital), ④ at the stop-loss point, ensure that the trade size stays within the loss amount determined in ③ — in other words, the important thing in money management is to decide the stop-loss point in advance, which essentially is not so different from settlement theory.
How to decide the stop-loss point in advance
Getting back to the point, if you determine the loss amount from the ratio to your own funds when deciding the stop-loss point, the stop-loss becomes sloppy. Your own funds are your own preferences and have nothing to do with the market. It is very simple to base stop-loss decisions on your own funds, and anyone can do it easily. However, it is problematic to casually decide on a crucial point that determines losses of your valuable capital.
Also, in trading, you need to decide not only the stop-loss point in advance but also the take-profit point. And the important thing is to set the stop-loss point based on the ratio of the potential profit at that take-profit point. This is the so-called risk-reward ratio, indispensable for achieving a trade with small losses and large profits.
