Stops, targets and risk to reward

Every trade needs 2 exits decided before you click buy or sell: where you get out if you are wrong, and where you get out if you are right. This lesson covers both.

Where the stop goes

A stop loss belongs where the trade idea is proven wrong. It is a decision about the market, made in advance.

If you buy because price bounced off the prior day low, your idea is that the level holds. If price falls well through that level, the idea is wrong. So the stop goes a few ticks beyond the level zone, where a normal wiggle will not hit it and a real break will.

Avoid 2 common habits:

• A fixed stop on every trade. 10 ticks might be fine on a quiet morning and far too tight right after the open. Let the chart set the distance, and let position sizing (lesson 10) set the size.
• No stop at all. Some traders skip stops because stops get hit. A trade without a stop has unlimited risk, and 1 bad trade can undo weeks of work.

Where the target goes

A target goes where price is likely to run into trouble: the next key level, the overnight high or low, or the other side of a range. Look at the chart and ask, "Where would the other side of this trade start fighting back?"

Risk to reward

Risk to reward compares what you could lose with what you could gain. A trade risking 10 points to make 20 points is 1 to 2.

Risk to reward only makes sense next to your win rate. Together, they decide whether you make money over time:

Flip it around and the danger is clear. Risk $200 to make $100, and you need to win far more than half your trades just to break even.

Bigger is not always better

A 1 to 5 target sounds great, but if price rarely gets that far, your win rate drops and the trade stops working. Pick targets at levels price can reasonably reach. Your journal (lesson 17) will tell you which ratios suit your setup.

Use a bracket order

Most futures platforms let you attach a stop and a target to your entry in 1 order, called a bracket or OCO (one cancels the other). When 1 exit fills, the other cancels automatically.

Place both the moment you enter. Deciding your exits while a trade is moving against you, with your heart rate up, is where most bad decisions happen.

Before every trade

Say it out loud or write it down: "I am entering here. I am wrong there. I take profit here. That is a 1 to [x] trade." If you cannot fill in every blank, wait.