Break Even Stop - Forex Risk Management
Break-Even Do’s and Dont’s
Break Even conversations are similar to addressing the elephant in the room. No one wants to talk about it because it’s so subjective and everyone thinks they have it figured out.
A Break-even trade happens in 2 ways:
1. You set your stop at the entry price of your trade, after price has moved favorably. Later the market comes back to hit your stop-loss, to take you out of the trade at break-even.
2. Price has moved against you and you manually close out the trade where you originally entered, making it a break-even trade (because any loss or profit is not real until the trade is closed).
To do or not to do
Managing risk has to be your number 1 goal for your strategy and to be honest boys and girls there are many different ways to slice this cake. We’ll go over a few approaches that will demonstrate the logic required to start attempting to move stops to break-even. Before we discuss that, we have to decipher what constitutes a sound break-even trade.
To sum up in one word the one thing that should never dictate a break-even trade… Emotion. This is tough for a lot of traders because the market move without rhyme or reason sometimes and uncertainty is a dark place for a lot of people.
Let’s think of an example: “You have placed a buy trade on a pair and price is approaching your TP, at this point you’re licking your chapped lips because you’re about to be right!, but price doesn’t quite reach your target and price starts to drop and eventually ends up near your entry” What do you do?
The right answer is to do what your system tells you to do. If your system does not have an answer, go back to the drawing board. You do not want to find yourself in a position where you have moved your stop to break-even too early because you were afraid to take a loss before price goes directly to your target with no resistance. Hear me, this is definitely easier said than done. It will take practice, actually sticking it out over and over again.
Now let’s talk about how to go about break-even trades. Your system should have parameters that dictate whether your stop moves similar to how you would use a Trailing Stop. Let’s talk about different approaches and the logic that facilitates good break-even trades.
Indicator - based
If you use the ATR to determine how far price is likely to travel and once price reaches that value we can move our stop to break-even why? Because if prices retraces to our point of entry from there, then the trade we entered is probably over.
If the MACD line and signal line cross back against you then we move our stop to break-even why? Because momentum has shifted and if our target is not hit soon we don’t want to catch the bad side of momentum
News - based
If you have entered a trade in a certain direction and a big news event is coming out like an interest-rate change or an employment report. It would be wise to move your stop to break-even to close out any risk (Albeit no one can avoid slippage) and if the news comes out in your favor, you still get to take part in that move.
If the market gives you a lot of information that contradicts your position in the market. Yes, the market can reveal news to you as well. This is probably not for novice traders because they should always be following a system to the Tee. After you’ve accrued some chart-time you will recognize patterns that signal to you that your trade is almost over.
What do I mean? In my own trading, if I see a momentum failure, which is usually a signal to enter in the opposite direction, I’m already looking at charts carefully attempting to prevent profits from getting away from me any more than they normally would.
Summary - Should you aim to break even on your trades?
- If your system has a logical reason to do so, then do so. Be very cognizant that your emotions are not your deciding factor
- If you move your stop to break-even do not do so too early, give the market room to breathe. The market will retrace and it is nothing to get nervous about.
If protection against losing trades is important to you, Plus500 is the broker to go to. They offer gaurenteed stop losses which means even if the market gaps, your positions will be closed at the requested price.
Don’t bet the farm.
Don’t lose your shirt.
Cut the L.
Keep the W.