Why Profit Taking is Hard Psychologically.
Profit taking always creates problems for traders because – you are never going to get the maximum profit per trade and can never be perfect sometimes you will get out and the profit will go onto become much larger and this causes many traders a problem – should they bank or hold? Other traders are taking so many losses, their pleased for any profit they get on their trading signals and just bank small profits. The result of this is - they never have the discipline to run profits far enough to cover their losing trades.
So how do you deal with both problems -let's take a look?
Tips on Average Profits to Aim For In Relation to Losses
In my view, you have to accept that you are only going to get a chunk of the profit and most times, it will end up bigger if you held on but that doesn't matter – you have to focus on what you are making and are the actions you are taking, in line with your trading plan? If you are working within your rules be happy with what you get, the aim is to make an overall profit on your account and nothing more. In terms of profits to losses, you need to have an idea of what your average profit needs to be in line with the trading strategy you have - so if you work on 50% of your trades winning and 50% of your trades losing, what should your average profit be in relation to your average loss?
I work on trying to get double the profit on my winning trades, compared to the losses incurred on my losing trades. While this is a rough rule of thumb, it gives me something to aim at. Many people try and reduce profit taking to mathematics and ratios etc and this is fine for boffins but it's not the real world of trading. I prefer to a have a less rigid approach to trading and would let better trades run on and cut others a bit earlier, depending on how I see the market action.
Managing Trades to Maximize Profits
Different trading systems require different approaches to profit taking. In short term strategies, a target should be usedwhile if you are following longer term trends, a trailing stop can be used.
If you are trading channels or swing trading, your profit objective should be one which is to take to early. By this I mean you want to be out of the trade and banked before a major support or resistance level is tested. While the price maybe drawn up to this level the closer it gets to IT, the greater the chance is you will give profits back so get out early. In swing trading once in the market, the stop stays where it is or is moved to entry but never trailed up because you are looking for quick profits and if the stop is to close, you will be bumped out the market.
If you have a longer term trading strategy and your trend following, I would not normally have a set target, as trends can run on for long periods and in most instances can run far further than most traders think - so you need to trail your stop up, to lock in a level which if hit, will see you exit the market and liquidate your trade.
The question is where do you trail a stop in a big trend? This question has no set answer but should be behind a level of support ( in a bullish market ) which is outside of the normal volatility you see in big trends. Personally, I like a level of support behind a simple moving average such as the 40 day. If a trend looks like its going to blow off ( I.E you see an accelerated up trend is occurring or prices are spiking vertically) then, I would exit at the market or move the stop up tighter. You can always get back in a big trend but when you have a good profit or you think the trend is going to come to an end, you can lock it in.
At any time on a trading signal when you have a doubt – keep the old trading phrase in mind “ If in doubt get out” just simply exit the trade, if your not comfortable with a market order and go flat.
Profit Taking In Relation to Overall Account Equity
You can manage individual trades but you should also manage your overall account equity as well and this will mean changing your profit objectives sometimes and taking profits quicker or letting them run.
If are just finishing a losing streak and have an open profit, you might want to take some profits in just to bump your account equity up off a low and stop the fall. On the other hand, if you are suddenly confronted with a huge open profit in relation to your overall account size, forget about it running on and being greedy, just bank it.
Final Words
The above doesn't give a set answer for all accounts or trading strategies and isn't intended to. Money management of trades in Forex is seen as some science by many but as we have commented numerous times, science doesn't apply to trading currency pairs in the real world, you have to think and manage your trades in line with your trading plan but also, taking into account equity overall which means - how you see each trading signals potential and how, your overall account equity is moving.
One of the biggest challenges of Forex trading is making money long term on your account, in an environment where only you can wrong and the price of any currency is always the right price. My view would be in terms of this Forex taking profits tip would be:
Always look to protect with strong money management first and place a stop loss as soon as you enter a trade.
Be flexible in your view of each trade and don't be afraid to adjust your targets or take trades out which you don't feel comfortable with.
Finally, if you have winners if the trade looks right to you and is in line with your trading rules, have the discipline to run it to target. Forex trading is anarchy and your trading rules and your discipline need to be applied to survive.
Be prepared to run profits but also don't be worried about taking trades out the market, if need to – so long as you keep your win loss ratio in mind overall and you have a trading edge you will win long term.
