Art of Taking Profits in Trading
Many traders claim that their game plan emphasizes trade entry but not trade exit. As a result, they argue that they do not make
enought profit on each trade. If you have not thought about trade exit prior to opening a position, then you have a problem with your game plan because you have not adequately calculated the risk involved in the position. If you’ve calculated risk properly, then you should know two elements ahead of time: 1) your changes of being right on that trade and; 2) the size of your potential profit versus your potential loss. If you don’t have that information, then you still need to work on your game plan.
Art of Taking Profits in Trading is properly-designed low-risk game plan will give you optimum profits within your comfort level for trading. Thus, the task of maximizing your profits should simply be one of following your plan. For example, if you have a plan that gives you a 50%
return each year and you maintain that record year after year, compounding your profits, then you will be one of the best traders in the world. Some of my clients have designed plans that give them three digit rates of returns each year. As a result, all it takes for any of them to become one of the best is to avoid self-sabotage by becoming too greedy or too fearful. If you concentrate on anything other than maintaining consistency, then I believe your concentration is misplaced.
Top traders have four primary beliefs about taking profits. Taking profits is equivalent to the predator’s kill. When the predator acts, he must be quick and decisive. Thus, the first belief is that if market conditions change so that your reason for
your trade no longer applies, then take your profits. Avoid being greedy. Just react to the signals provided by the market.
Art of Taking Profits in Trading is a belief about taking profits is to do so when the market reaches your objective. Be patient and allow the market to move toward the target. If you set your targets at extreme levels, then you probably don’t give up much by taking your profits at those levels. In most cases, market conditions will probably change before your target is reached, so you can get out simply by acting when those occur. If the market hits your target, however, I recommend that you take profits by continuing to move your stop closer to the market price as the target is reached. Wait for the market to take you out. If the market keeps moving rapidly in favor of your position, then you have no reason to take profits. Art of Taking Profits in Trading is about taking profits is that one should do so if market volatility changes dramatically, thus altering the risk parameters of the trade. Volatility typically increases when a market becomes popular and mass hysteria exists. Although a lot of profit potential may exist in that market, the risk is much greater compared to the potential profit. As a result, increasing volatility after you’re in the market might be a good reason to take profits. Bear market moves are often climatic, and that climatic portion of the move may go past your target area.
However, if you wait for the climatic portion of the move to end, you might get whipsawed in the opposite direction as soon as the move ends. As a
result, the fourth belief is that when such a move occurs, you should take profits.