Before placing any trade, a strategic trader must always know and identify the maximum risk exposure for the trade. Once the risk is identified, it should be compared to the possible profit target. If the profit target does not justify the risk exposure, the trade should not be taken. It does not make any sense to risk a dollar to earn a penny. One of the common mistakes that cause traders to consistently lose money is that they fail to let their winners run. They quickly close out their trades as soon as they become profitable. While no one can argue against taking a profit, consistently taking profits that are not consistent with the desired risk/reward ratio ultimately leads to a net loss. Once a stop is hit, it immediately eradicates the small profits of three or four trades that were prematurely closed. It is hard to leave your money on the table, but there are ways to move up your stops and use a trailing stop to allow you to stay in your trades to realize your designated target.

Once a trade is placed, prices will always fluctuate; that’s the nature of the auction process. Rarely will a trade directly navigate to the profit target without a retrace. This is where paper trading comes into play. It allows a trader to watch, learn, and record how long it takes to reach a profit target and whether the risk/reward strategy that they are using is in fact feasible and workable.