Let’s find out what is profit on the exchange.
- What is the need to make a profit?
- Can profit fix losses and stop profit?
- The main mistakes of traders when setting a profit
- How to understand how effective your trade is?
The word profit in trading means the difference between the investments made and the income received. This is the so-called net income.
The formula will look like this:
Net Income = Income Received – Invested.
In the language of economists, this is your profit. You must understand that profit is always less than income. Because of the total amount that you received from the transaction, you must subtract:
- the amount that you spent on the purchase of certain securities,
- percentage to the broker
- payment for using the terminal, and other expenses related to trade.
Remember, profit and income are two different things. You can earn income, but not have a profit. And if you have more expenses than income, then you trade in minus and thereby suffer losses, drain the deposit.
There is also the term to make a profit. In essence, this is almost the same. From English, it is translated as “take profit”. In trading, this means a stop order for an open order, it indicates the exact price at which the transaction will be closed automatically with a predetermined amount of profit or profit. In other words, you determine the price at which the broker closes your trade with a profit, even if you are not online at this time.
Such take profits on exchanges are more relevant than stops that limit losses. Profits act opposite and fix the size of profit. You can get limited profit, but at the same time reduce the risk of losing it. There is popular wisdom – you go quietly, you will continue. It’s better to make less profit, but regularly.
What is the need to make a profit?
Only 15 years ago, only people with solid capital could become a trader. And today anyone can start trading on the stock exchange who has an extra hundred dollars lying around. Since dealing centers removed restrictions on the minimum deposit amount.
A lot of people appeared on exchanges who are far from economics and finance, do not know the appropriate terminology, and do not understand the topic. Too often, profit is understood not only as profit, but also total income for the entire trading session.
When to set a profit:
- with strong rollbacks;
- when you need to leave your computer for a long time (leave your home, go to bed, go on vacation or a business trip);
- when there is a corrective movement against the current or future trend;
- with scalping or other types of trading where jewelry accuracy is needed;
- when using pending orders, if you clearly understand the purpose of your trade;
- when you clearly understand the market situation and the nature of the price movement.
And in general, it makes no sense to open a deal if you do not understand in what place you will close it.
It is believed that it is not necessary to set a profit if you are trading under the supervision of an experienced mentor. Here they mean the psychological effect – a beginner needs to develop the skill of opening/closing deals according to the teacher’s strategy to understand in detail how the processes are and to believe in oneself.
Can profit fix losses and stop profit?
This is paradoxical, but yes. When profit is fixed by profit and loss by stop, this is a classic of the genre: a deal is closed when quotes move in the right direction and when they reach the specified point.
But there are exceptions:
- Suppose a currency pair goes down by 200 points, and a trader, to compensate for part of the losses, puts a stop at the level of 130. Then the profit will fix the loss.
- Stop can fix profit if you have 200 profit points, and you put stop at +10 and profit at +300.
The main mistakes of traders when setting a profit
The trader is poorly oriented on the exchange and does not understand when it is possible to set a profit and when it is impossible. He does not see the starting point from which the market is working out a mandatory and completely logical move.
How to understand how effective your trade is?
Exchange trading performance is easy to determine. Traders call the result a profit factor and calculate it according to the following formula:
Profit factor = The sum of all profitable trades / the sum of all unprofitable ones.
With a value greater than one, your trade is profitable. If less – then you suffer losses. The optimal value is considered the profit factor of 1.6 and above.
How to set the profit:
- Before opening a deal, you need to determine where the initial stop will be;
- Competently reduce losses – under no circumstances move the initial stop if the deal goes into minus;
- But profit should not be limited, let the price determine it. If its movement brings income, then the stop can be gradually moved towards the price movement;
- The market can also fix your profit – any growing stock will run out sooner or later, and with a reverse movement, it may well close your profitable position just below the price peak.
When reaching the profit level, do not take full profit. No one knows for sure how the price will behave – it will break the level and go higher or turn back. It makes sense to record only half of the income, and let the market determine the remaining amount. Your business is to correctly transfer the feet.
Keep your risk/reward ratio at 1: 2. Try to trade shares that are not limited in their movement or are at annual or historical highs/lows.
We wish you all a good profit!