Most people's idea of trade management is very simple, "keep your losses small and let your profits run." That's a very good concept, but how do you really do that? In this short article I'm going to lay out a few simple rules that can turn potential losing trades into winning trades. It can also help you get the maximum amount of profit from your good trades. There's nothing more frustrating than watching a winning trade turn into a losing trade. Once you have profits in a trade you don't want to lose them; you want to keep the profits you've already earned while still giving yourself a chance at even bigger profits.

There are 4 main steps to managing a Forex trade

There are 4 main steps to managing your Forex trades. However, there is a bonus 5th step which is the key to eliminating many potential losses. This 5th step will be discussed later, at the end of this article. Here are the 4 main steps:

1) Place a stop-loss.
2) Raise or lower your stops as the price moves in your favor.
3) Add to your winning positions.
4) How and when to exit a trade.

Step 1 - Placing a stop-loss

Whenever you enter a trade you should always enter a stop-loss at the same time. In long trades I will usually place my stops 2-6 pips below the most recent low. In short trades I will usually place my stops 2-6 pips plus the spread above the most recent high. For example, if I enter a short trade at 159.50 in the EUR/JPY, and the most recent high is 159.70, I will place my stop somewhere between 159.76 and 159.80, which is 2-6 pips above that level and which includes a 4 or 5 pip spread.

As another example, if I enter a long trade at 159.50 and the most recent low is 159.30 I will place my protective stop about 2-6 pips lower than 159.30.

Placing an initial stop is very important because it protects you from a major loss. Some traders have lost their entire accounts from incurring one large loss. Don't let that happen to you.

Step 2 - Raise or lower your stops as the price moves in your favor

Once you enter a trade and the price moves in your favor you want to lock in some of the profits as soon as you can. There is nothing more frustrating than being ahead on a trade and then watching it reverse direction and eventually ending with a loss on the trade. I could give you a more detailed explanation of this, but for now I will show you the basics of raising or lowering your stops to protect your profits.

There are three directions the market will move. The market will move up (in an uptrend), down (in a downtrend), or remain in a trading range. In a trading range the price will move up and down, but will stay in a specific range.

When and Where to raise your stops in an uptrend

Once you have entered a long trade and the price starts to move in your favor you will raise your stops to each new swing low. A swing low is defined as the lowest price level (during a retracement) between 2 high prices. For example, let's say you entered a trade at 158.00. After entering the trade the price climbed 150 pips to 159.50 and then retraced downward 50 pips to 159.00. The swing high would be at 159.50.

Let's now say that after the price retraced to 159.00 it then took off higher again and eventually reached a new high at 160.00, surpassing the old high of 159.50. Your swing low would now be at 159.00, which is the lowest price the market dropped to since it produced the swing high at 159.50. Once the price broke above the old swing high at 159.50 you would then raise your stop from your initial position to just a few pips below the new swing low at 159.00. If the price then dropped down below 159.00 and stopped you out you would still have almost 100 pips in profit. But if the price continued to climb higher you would still have the opportunity for bigger profits.

Each time the price retraced and then reversed higher again, making a new high, you would continue to raise your stops to the most recent swing low. As long as the prices continued to climb higher you would keep locking in more and more profits.

When and Where to lower your stops in a downtrend

The opposite is true in a downtrend. Once you have entered a short trade you will lower your stops to each new swing high. A swing high is defined as the highest price level (during a retracement) between 2 low prices.

When you enter a short trade you will place your initial stop a few pips plus the spread above the high price. After the price moves in your favor you will wait for the price to retrace. After a retracement you will wait for the price to reverse lower again, making a new low price. Once the price exceeds the previous low price you will lower your stop to a few pips plus the spread above the most recent swing high. Each time you see a retracement you will wait for the price to reverse back and then drop lower until it exceeds the previous low price. Once that happens you will lower your stop to a few pips plus the spread above the most recent swing high.

Raise or lower your stops even when there are no new swing lows or swing highs

Once in awhile you can get into a trade that either shoots up like a rocket or drops like a rock without any swing highs or swing lows being created. When this happens you should be raising or lowering your stops to protect some of your profits.

For example, if the price moves in your favor 250 pips without giving you any swing lows or swing highs you should raise your stop at least half the amount of your current profit, or 125 pips in this case. Prices never continue in one direction forever, they always retrace or reverse at some point, so once the prices begin to retrace you should then start raising or lowering your stops as explained above (at each new swing high or swing low).

I hope that this short article has given you some useful information that you can use in your trading. If you would like to learn more about the other two main "trade management" steps along with the 5th bonus step, about how to turn potential losing trades into winning trades, please visit My Forex Trading.