I have talked in detail about this topic, how to maximize your profit in Forex and stock trading, in this video. Here in this article, I will explain it once again to help those who cannot watch our videos. Please make sure to Subscribe to Our YouTube Channel not to miss any of our videos.
Maximizing your profit is so important in stock and Forex trading, and if you can do that you will lower your risk, and in case some of your positions hit the stop loss, your account wouldn’t be affected because you have already recovered the losses with trade setups and positions that you have already taken and you have been able to maximize your profit with them.
The most important thing in maximizing your profit is your trading strategy or trading system. Some of the trading systems don’t allow you to maximize your profit and they don’t show you a proper place to set a proper stop loss for your positions, but some systems that I’m going to talk about one of them here, show us the best and most optimum place to set a stop loss. They let us have a tighter stop loss and a wider target.
Bollinger Bands Squeeze is one of the trading systems that we follow. If you have been following us on LuckScout, you know that this is one of our most favorite trading systems. I have already talked about this trading system in several different videos, but if this is the first time that you are hearing about it, I explain it briefly here:
It is such as simple trading system. You need two things in this trading strategy. The first thing is a strong movement. You need a strong movement like the one you can see on the below chart which is GBP/USD daily chart. We had a strong upward movement and then the market became exhausted, or bulls became exhausted because balls or buyers took the control. They bought and bought and bought, and so they made the price go up. But it is normal that they get exhausted after a while and they stop buying. They wait but the market is still bullish and bulls haven’t given the control to the other party which is bears or sellers. They haven’t sold to collect their profits because the price would have gone down if they had done this. If they sell to collect their profit the price will collapse, but when the price starts moving sideways after a strong upward movement, the market is still bullish, but it is exhausted and wants to take a break and this is what we want.
So the first thing we want is a strong movement and, then we need the market to go sideways and when it does this, Bollinger upper and lower bands that have been too far from each other because of the strong movement that we already had, they get close to each other when the market starts moving sideways, and if it keeps on moving sideways, then Bollinger and upper and lower
bands become so close to each other. They become parallel with each other in some parts (the yellow rectangle on the below chart). As you can see below, Bollinger upper and lower bands have become almost parallel with each other.
When the strong movement is an upward movement, we plot a resistance line above the squeeze pattern. We should locate a resistance line above Bollinger Bands squeeze, and then we wait for resistance breakout. We wait for one of the candlesticks to close above the resistance line. Then, in the below chart that I am using it as an example, December 3rd 2019 daily candlestick on GBP/USD daily chart closed above the resistance line. When a candlestick closes above a resistance line in this trading system, then you have a trade setup. In this case, it is a long trade setup which means you should take a long position, or we can call it a buy signal which means you should buy.
At the same time, when this candlestick closes above resistance line, RSI has also broken above the resistance line that it had form. RSI also forms support and resistance lines. When the market started moving sideways, RSI formed some highs that if you connect them to each other you will have a resistance line on RSI. When this candlestick closed above the resistance line on the price, RSI also closed above its resistance line too, and when the next candlestick opened, RSI was already above the 7o level, which is an important confirmation for a long trade setup.
The market can go up for hundreds of pips when RSI is moving around or above the 70 level.
You don’t have to have RSI on your charts, but as we had several articles about this indicator which is an extremely important and strong indicator, and many of you asked about it and wanted to know it in more detail, I added this indicator to my charts to have it in all trade setups to show you how it can confirm our trade setups. However, if you don’t like to have it on your charts, you can remove it. You don’t need it but it is a good confirmation when you have a trade setup like the below one.
So when December 3rd 2019 candlestick closed above a resistance line, you could take a long position and then set your stop loss several pips below the low price of this candlestick which becomes about an 80 pips stop loss. Or to be at the safe side, you could place your stop loss a little lower and had a 100 pips stop loss. The market went up for over 500 pips in this case. I mean you could have a 100 pips stop loss and you could make five times bigger than your stop loss in this case, but the question is, whether you have been able to take the strong upward movement that formed after the resistance breakout (Bollinger Bands Squeeze Breakout)???
When a candlestick closes above a resistance line, you never know how far the market will move. Even when you have a strong trade setup, it is possible that the market goes against you and hits the stop loss. When December 3rd candlestick closed, we never knew how far the market wanted to move up. All you can do is to wait for a trade setup to form, and then you take a position and set a proper stop loss and target. The rest is not under your control.
We wanted to talk about maximizing your profit. I game you the above explanations to reach to this point that I can tell you about a technique that enables you to maximize your profit in Forex and stock trading:
When you have a 100 pips stop loss, and a 500 pips movement formed after the trade set up, could you take all of the 500 movement?
You couldn’t do that most probably. You couldn’t do that if you would take just one position and you set a 1:1, or 1:2, or 1:3 take profit for your position, because when the market starts moving to your favorite direction and you see that your position is in profit, you always like to close your position as soon as possible, not to lose the profit you have already made, and sometimes you don’t wait for the market to hit the target.
But there is a technique that you can use to maximize your profit. You know that in every position that you take, you should not risk more than 3% of your account balance. So you have to calculate your position size based on the stop loss size that the trade setup gives you. It means if you are going to set an 80 pips or 100 pips stop loss for this trade setup, and if the market goes against you and hits the stop loss, you should lose only 3% of your capital. So what position size you should take that if the stop loss becomes triggered, you lose only 3%?
This is different based on your account size and your account balance and also the stop loss size. You can use our position size calculator.
Now… here is what you must do to maximize your profit:
Whatever your position size has to be, for example you want to take a 3 lots position, then, instead of taking a 2-lots position, you can take three 1-lot positions. If you do that, you will have a chance to maximize your profit. You will set the same stop loss for all three positions, but you set different targets for each of them. For example, for one of them, you set a 1:2 target which means the target size is twice of your stop loss size. So if your stop loss size is 100 pips, your target will be 200 pips. This is for the first position. If the market hits the target, and so the first position becomes closed, you move the stop loss of the other two positions to breakeven. Therefore, if the market goes against you and hits the stop loss, you won’t lose any money anymore. So, holding these two positions will have no risks for you and you have already made some profit by your first position.
For the second position, you can set a target which is three or four times bigger than your stop loss, and when the second position hits the target, you move the stop loss of your third position a little higher. For example, you can move it higher to lock 200 pips profit which is twice after the initial stop loss or 300 pips profit which is three times bigger than your initial stop loss, and then you let it go until it hits the target which is probably five times bigger than your stop loss size. If you do that, you can maximize the profit with such a trade setup.
This is how you can maximize your profit when you have a trade setup like the below one, but if you want to take just one position and set for example a 1:1 or 1:2 or 1:3 target for your position, you need to have several winning positions to be profitable at the end of the month, because there is no doubt that you will make some mistakes and some of your positions will hit the stop loss. But when the market hits your stop loss, if you keep your losses small and you maximize your profit in your winning positions, even if you have less number of winning positions compared to your losing positions, you will still be profitable at the end of the month.
So maximizing your profit is something that you really must do if you want to be profitable at the end of each month.