If you look at a particular trade and study it by example, it’s better to do it directly on your computer screen with a training account. You can just look at your buy-line, look at your stop loss (on most platforms, certainly on xStation, you drag both lines onto a comfortable level of SL/TP and see your potential gains or losses in pips and colors - very convenient) and see the way your trade is going, and realize how badly or how well you are going to do if you place that line in a different spot - all with real securities and in real time.
The good rule of thumb that you set up your profit and a stop loss at a 2 to 1 ratio. The easy way to get that through your mind is by thinking that if you were ever to play a game of heads and tails with us, if we flip heads - we give you two dollars, and if we flip tails - you give us one dollar. If nothing else, the law of averages will push you to play this game with us because, quite simple, at the end of the day you’re going to be up money.
If profit and stop loss is set at 2 to 1, you should really just let your odds play out because that way your trades are always going to me 50% more profitable than ours. So, that’s it. As much as we would like to pretend that trading is a somewhat scientific process, mostly you’re just playing the more sophisticated version of heads and tails.
Read also: Managing risks (part 1)