- October 13, 2021
- Posted by: CoachShane
- Categories: Basic Trading Strategies, Trading Article, trading videos
One important exit to consider when trading is where to take your profit taking exit strategy will be.
Just jumping out of a trade is never a strong choice so what are your choices in taking your gains?
- Fixed target price – This is a defined price point in the instrument you are trading
- Trailing stop loss – Using a variety of methods, this decreases risk and locks in profit as price moves in your favor
Before we continue, ensure that you know where you will exit if your trade goes against you.
There is one special thing you should know about your stop loss when it comes to risk management.
Let’s cover it next.
Stop Orders Are Filled A Certain Way
A stop loss is placed in the market as stop orders but when they are hit, they become a limit order and will be filled at the best possible price.
What is the problem with that?
Unless you use a stop limit order, you can face a worse fill than you anticipated.
While you may be expecting to get filled at the black line on the left, depending on the market and volatility, you may get filled at a lower price.
This makes your loss larger than anticipated.
You can learn more about setting your stop loss at this blog post.
The key point is when you know your exit point in a losing trade, you can define your risk in the trade and measure your risk reward ratio.
Trailing Stop Loss Techniques
We won’t cover much with trailing stops as they are covered elsewhere on our site.
In brief, with trailing stop losses, you would find a method to bring your stop closer to price as it moves in your direction. This let’s you have your winners run until a big enough reversal takes place to stop your trade out with a profit.
This is a simple price action method of using a potential support level to trail your stop. If you were in a short trade, you would set your stop above a resistance levels and continue to trail your stop down.
Each time price movement makes a new high point, you would bring your stop loss under the pivot low. The idea is that this pivot low is potential support and if price breaks through it, we could be seeing a correction in the instrument or a trend reversal.
Using A Fixed Price Target For Wining Trades
This method allows you to know in advance the price you will exit your trade at for a winning trade. Of course market conditions have to be right for your position to make a profit. This is why having a trading system that has your precise entries, exits, and risk management is vital. Not all market conditions are good to trade so ensure you have outlined exactly what you are looking for in your trading plan.
We are going to cover:
- Support and resistance levels – Structure
- Reward to risk ratio scales
- Measured move
These are the three more popular approaches to taking profits.
Support and Resistance Price Levels
Using a trending market as our example, each time price makes a new high or low and pulls back, it puts in a pivot level. Do not be confused with the mathematically calculated pivot points. These are actual price structure levels.
In an uptrend, we can expect that the swing high level could act as resistance. In this case, price blasted through but did pull back the next day to test it.
The setup of the trade is as follows:
- Price was in an uptrend and had broken through a prior resistance level.
- Price pulls back and the former resistance is acting as support. Price pushes below and is immediately bought up the same day
- Your first price target for trade management or full exit would be the potential resistance at $18.08. This is a $2.02 per share potential profit move.
Works the same on short trades.
- Price has rallied off of support at $93.25 in a down trend
- A few entry criteria – trend line break and inside candle reversal
- Support holds at $93.26 and price rejects
By taking action near the support level, you have either banked profits or scaled out and reduced risk.
Using Risk Reward Ratios
Taking profits does not have to be complicated and this method is simple.
Know your risk and scale out or take profits at a multiple of that risk
This stock is in an uptrend and this is a pullback against it.
- Price pulls back into prior resistance now support
- Failure test entry at support and bottom of price channel
- $1.11 initial risk on the trade
T1-T3 are price targets using 1X, 2X, 3X the risk of $1.11. The first potential exit or trade management area would be at $40.56.
One thing to keep in mind is where the multiples of risk land on the chart.
In this extreme example, the first price target of 1R is above the prior resistance level.
Although price does touch the target and pulls back, the higher probability is there would be some resistance to new highs to hit your target.
I said this is an extreme example as the setup candle is quite large and the entry point is close to resistance. Generally, my stop on these trades with such a long lower shadow would be a little less than half up the candle.
Why do I do this?
- The shadow and the red close does not show the bulls one the days battle
- Stop is quite large and a larger stop size decreases positions size
- If price reverses half of the setup candle, an outside bar could be forming
It’s personal preference but the point is, if your price targets are slightly above resistance or below support, consider adjusting the target to a price just before the potential rejection level.
Measured Move Price Objective
This fixed price target strategy uses the rhythm of the market to decide the price.
The markets move in waves of corrective and impulse swings. We would look to enter in a corrective swing/reversal, and look to target 100% of the prior impulse swing.
- Price makes the move from A-B and that is the distance we will use for next price move
- Price has pulled back and set up a failure test support holding entry
- We take the move from A-B and project it from the low of the candle at C
- D equals the same distance in price from C as B is from A
Understand that it won’t be exact all the time. Price can and will fall short or exceed the fixed price target.
What having targets does do is allows consistency in your taking of profits.
Regardless of what exit strategy you use for profits, you must understand certain moves in price action that should have you concerned.
Strong momentum against your position is cause for exit regardless of your stop loss routine or take profit strategy.
Consider the black line your ultimate price target. If you see outside bars on the left or gap up (long shadows are another sign), you may want to consider an early exit.
This is not a knee jerk reaction. This is price telling your that, for at least this period time, something has changed in the market. In fact, these types of candles that show up near a support level (or resistance level – just turn the candles 180 degrees) can be entry candles in a support/resistance holding or failing trade.
The beauty of this type of profit taking when trading is that you have an extremely consistent routine on every trade you take.
- Are any of these exit strategies better for swing traders?
- Can day traders uses these to take profit as well?
The answer is that these methods of taking profits are not for one type of trader. We have simplified a very important part of trading and have removed knee jerk emotions out of taking profits.
It’s a fact that traders let losers run and cut winning trades quickly for emotional reasons. This is not what successful traders do.
Fixed price targets with a trade management plan gives you concrete steps you can take with each position you take.
This can make for less emotions and a healthy equity curve.