Avoiding Taking Profits Prematurely

Student's Question:

I chose the Head and Shoulders Pattern of the USD/JPY daily Chart which also shows interesting entry points when the Exponentional Moving Averages (EMA's) are being used. 

You will find the the following EMA's on the chart: 200, 50, 20 and 10. Based on the 200 EMA-line the trend of the currency pair is a Down Trend. Therefore I will not be tempted to place trades against the trend. The chart shows 2 crossovers situations that can be qualified as higher probablility trades: The EMA 10 crosses below EMA 20 and EMA 20 crosses below EMA 50 almost on the same moments of time. 

Please comment on my placed limit orders. Am I taking my profits to fast?

Thanks

Instructor's Response:

Nice job on employing Moving Averages to take this trade in the direction of the trend on this Daily chart of the USDJPY. You demonstrate a good understanding of this concept.

Since your stop is only 40 pips in each case but the limit you have set is providing many times that amount in terms of profit, the Risk Reward Ratios you have in place (1:9 and 1:7.5 respectively) are very strong. For the record, we look for at least a 1:2 RRR on every trade.

In this case, this USDJPY continued to move to the downside so I can understand why you asked about taking profits too soon. A plan that a trader can employ to take advantage of an ongoing move without having their entire position at risk is to trade multiple lots and scale out of the position.

For example, let's say that you opened 3 lots on each of these trades. As soon as the trade reached the 1:2 RRR, in this case +80 pips, one lot could be closed out and the stop could be moved to your initial point of entry...a breakeven stop.

As the pair progressed, another lot could be closed at the 1:3 RRR point...in this case that would be +120 pips. (3 x 40 pip initial stop = 120 pips) On the last lot the stop could be trailed at a respectable distance, let's say a hundred pips or so, to capitalize on any additional profit should the pair continue to move in your favor.