Remember that when you are a day trader, you are getting in and out really fast. You’d like to take a few trades in a day (for me, I take up to 3 trades in a day).
When you take short-term day trades, your stop-loss has to be close so that your profit target can be reached fast.
For example, if I put a trade where my stop-loss is 100 pips away and my profit target is 150 pips, it’ll take me days or even weeks to reach my profit target. Because of this, I can’t place that many trades.
But if my stop-loss is 10 pips away and my profit target is 15 pips, I can take profit in about one or two hours. Thus, I can place more trades per day, which means I can make more pips per pip risked.
“But wouldn’t I have to pay more commissions?” you ask.
Yes, that’s true; when you place a tighter stop-loss, your cost of trading is higher. So let me share with you a little trick I use to cover these transaction costs.
Covering Transaction Costs by Tweaking Your Profit Target
In my Forex day trading strategy, I used to always aim for a profit target of 1.5R with a tight stop-loss of 8 to 10 pips.
But to cover the higher transaction costs, I want to make a bit more profit to make the trade worthwhile.
Recently, I found that targeting 1.6R is more profitable if my stop-loss is 8 to 9 pips away.
- If my stop-loss is 8 pips, my profit target is 8 x 1.6 = 12.8 pips
- If my stop-loss is 9 pips, my profit target is 9 x 1.6 = 14.4 pips
But if my stop-loss is 10 pips or more, then I’ll stick to a 1.5R profit target, because the fixed commission as a percentage of my profit is much lower.