When taking every setup, it is important to always have a plan. A trading plan should look something like this:
There should ALWAYS be three PRE-SET parameters for each trade: Entry Invalidation Target Without these three things set in advance, you are entering the markets with no plan and the emotions will start setting those for you, instead of your clear mind.
Now, most of you already know these things. But what happens once a trade starts running? If the price moves 100$ or 500$ in your favor, are the R/R parameters still the same?
Well, many overlook this, and the answer is, no.
Say you have this idea for an intraday long:
Entry at 18800
Stop at 18575
Take profit at 19500
The idea for the trade is a breakdown followed by an S/R flip with the breakdown zone as invalidation and 3 touch area for taking profit.
It’s a 1:3 R/R setup with you risking 230$ for a potential profit of 700$.
You get filled and the market rallies very close to your take but it’s not there yet.
You decide to move your stop to breakeven, to prevent any potential losses.
Many will think now this trade is risk-free and they can not lose money.
But now, you are risking 535$ of unrealized profit, for a mere 125$ of further profit!
Your risk-reward ratio is now 0.23. Horrible.
You decide to wait a little to see if you will get your desired target, and after a few hours, the market takes you out.
Congrats, you just lost 535$!
This is a very philosophical topic, as some might argue you didn’t really lose any money as your trading account balance remains the same. But if you made 535$, and gave it back, is that not a loss? In my view, it is.
Your trades' dynamic R/R is ALWAYS evolving. Every move of markets, every tweet of news, every dollar made and lost in unrealized PnL is changing your expected value and your risk-reward ratio.
It is my belief that people are far too greedy when risking money and far too fearful when taking profit, while it should be the opposite.
Be fearful when risking money!
Be greedy when taking your earnings!
The way my system works is that as a trade is running, I always use either a trailing stop loss, meaning my stop loss is rising as soon as the trade reclaims certain levels, or either I take profit partially before the target and let a small portion of it run towards the original TP.
The biggest tip I can give is when you take a trade setup, move ALL parameters down if long, or up if short, a little.
All of your entry, stop and take profit, move them 0.25–1% lower/higher.
Somehow, this works wonders.
This way you are fearful of your early entry, going to a lucky entry instead. Your stop moves from a general area that others just like you see, and you stay clear of stop runs. Your take profit moves from a desired area to a likely area with a higher chance of reach.
Trade ended up getting stopped.
But you still made money as you were making sure your trade evolved together with the markets.
If taking the idea of lowering stops, lowering entry, and lowering profit taking by 0.25–1%, the idea would’ve actually worked amazingly in this case!
Evolve with the markets, as they evolve every second.
Be greedy when taking profit.
Be fearful when risking money.
Not vice versa.
This is how you last a long time and consistently make money.
It’s a marathon, not a sprint.
Taking all this in mind, it is important that you track your trade management via journaling to see if it’s +EV to even intervene in the first place vs fixed parameters and sticking to them.
If your trading setups hit the original targets more often than not, it means you probably should just stick to “set and forget” type setups.
Evolving R/R is a concept that I think each trader can utilize in a way that fits him best, this is just my interpretation and way of using it to increase profitability.
Check out the content of CryptoCred where I learned about this concept for a deeper dive:
Cheers!
