Most people wrongly thing trading is about how often you are right. They look for the Holy Grail of being right 90% of the time. Yet they ignore even traders like George Soros are billionaires from being right slightly more than 50% of the time. How is that possible?
Worst still, too many people thing profits come from just picking the right 'risk, reward' ratio. So they will talk wrongly about 'profit targets' and reward to risk ratios. The problem is they are too often misinformed by well-meaning academics and instructors from 'institutes' and 'academies' and not by actual traders - and by actual traders, I mean hedge fund managers, not amateurs.
Of course if you are a beginner, I want you to get used to hitting profits and so take profits (TP) where more advanced traders will add to their winning positions. If you do not add to the big wins, or at the very least let them run and not cap them (see image below) because you are badly taught about risk/reward and profit targets, you will only ever break even in all your trades overall (because you will have 0% big losses, 50% small wins and 50% small losses). And so you will blame your win/loss ratio ie that you are not winning and calling the market right often enough. That is simply wrong.
Look, a coin is right 50-50. And God is right 10/10. So you are going to be 6/10 or 7/10 at best because you will be somewhere between chance and God! It is about how much you make when right, not how often you are God-like!
Whereas, if you let those profitable trades run you will have 40% small losses and 40% small wins and 20% big wins. (See image below).
So what is the truth about profits and winning?
My mentor, Bill Lipschutz, former Global Head of Forex Trading at Salomon Brothers put it this way in my book, The Mind of a Trader, (Financial Times) - he said it was about how much you make when you win, not how often you win.
We don't every want to cap profits. We don't want profit targets, we want the market to get us out. Of course when we enter a trade, we expect the odds in our favour of a move, and a big enough move to make the trade worthwhile, given the stop loss we may have in place. But, that does not mean we cap our profits once in the trade.
Indeed, we want to add to our winning positions and trades. So how do you not cap profits and still exit? Well that's easy. You can have a trailing stop loss, or wait until there is a loss of momentum (on the Pips Predator Indicator this is shown for you). What about adding to your winning positions. This too is simple once you get the knack - the rule I use is to add when the position is in profit by the amount the stop loss was, so that the trade is now at worst break-even and you can add an additional position without risking capital, but only risking your profits. (Again the PipsPredator calculates this for you of course).
So why is it important to add to winning positions? Because over 100 trades, a professional trader's trading results will look like the image below. The big wins are where we add to our winning positions.
Why are all trades not big winners (because no one, even Soros has a crystal ball).
See also: https://pipspredator.zendesk.com/hc/en-us/articles/115002999685