Scale Out Trading Profits

Posted in: Currency Trading, Swing Trading, Trading Article

scale out trading profitsTo scale or not to scale out your trading profits, that is the question.

The answer though depends on you and what your priority is in trading.

In my swing trading of the currency markets, many times I take some profits off the table and keep them safe in the confines of my trading account.

The reason I do it is not only a psychological one, but a risk control measure as well.

 

Taking Partial Trading Profits Settles My Mind

Humans love to be right.

In trading, the market is always right and I totally accept that at any time, price can turn against me and take back the unclaimed profits that were sitting there.

By taking a piece out of the market and banking some profit, I feel good. Not only do I feel good but it allows me to handle any retrace in unclaimed profits in a more relaxed manner.

After all, I am not a robot that can enter and exit the markets without a hint of emotion. If I see a full position giving back some of the profits, it bugs me.

Banking some profits at certain areas of the chart, whether it’s structure or other defined price target, really simmers down the irritation of “giving back” to the markets.

This chart is an example (not a real trade example) of how I would have scaled out of this trade.

  1. After shorting at the break of a range, this was an obvious price rejection zone for a scale out. Demand came into the market at this zone and you can see when price ventured into the region, it was held up before finally breaking to the downside.
  2. This was the pivot area where price began the upside corrective move. You can see an obvious bull candle and while price was held up, it slammed through.
  3. Final target area which is a 127% extension of the corrective move

scale out trading chart

I look at my trading account as business capital. Like many businesses, we never really know if the next investment in anything will pay off.

Sure, we look at probabilities (much like any business does on ROI) but that is about the extent of our control.

Either we get involved or we don’t.

We can’t control if the next trade we plunk our capital down on will pay off. I accept that the unknown variables are truly unknown and even though my plan says take the trade, whether it works out depends on other factors.

The markets are uncertain and scaling out lessens exposure for the unexpected. I can control entering the position. I can also control my risk. For me, the priority is not to avoid loss (surprised?) but to limit the impact of any loss.

I know I am going to lose trades and controlling risk, for me, is the utmost importance.

 

Reduce Risk Without Moving Your Stop

When scaling out, I don’t even have to move my stop to lessen the impact of a loss.

Let me show you a simple example using the currency markets.

  • 1 standard lot buying in with a 20 pip stop loss. Maximum loss is $200 (R).
  • If I scale out a portion of 3 at +20 pips and bank $60, that leaves me with 7 mini lots in the market.
  • If price takes me out, the loss is $140 (-.7R). That is if I don’t move my stop.

To keep this going….

  • scale out a portion of 3 at +40 which banks $120.
  • I then move my stop to break even after banking $180.
  • Regardless of what happens now, I will have taken profit….been PAID…on this trade.

I then have 4 minis still riding in the market where I can now trail the stop up under market structure.

My goal is not to reach targets but to make money.

As well….I have now free capital to use to get back into the market if the conditions are present.

Another thing which really does not matter to the average FX retail trader is slippage but let me quickly cover it.

If I am long a position and scale out with price going up, what is the chance of slippage? Next to none in the case of negative slippage.

Keep in mind that the average FX trader doesn’t trade the actual market. Their broker is the one that fills the trades and they offset their risk on another tier.

 

Optimal Profit Taking?

Is this this optimal way of banking profits? I don’t know, however many simulations show that staying with full position sizing throughout the trade is more profitable. I do know that the answer to this still evades me.

Some trades I do not scale out while others I do. That is a weakness I have in my own trading which is….I don’t have it set in stone. I actually go by gut feel which is not always the most optimal way to make a decision.

The scale topic becomes the heated debate in some forums with each side taking the extreme view that their way is the best. For me, I ignore all the “experts”. I accept that I may not be doing the “optimal” thing right now and there are areas of improvement for me.

The truth is that I will scale not because it may/may not have a positive impact on my overall results.

I do it because it takes the stress out of having a position on in the market.

At the end of the day, being in the right frame of mind before, during and after a trade is the most important thing for me.  Being in the wrong state of mind when trading can have detrimental effects to your performance.

Removing risk, for me, is just one way to keep the psychological dogs at bay and help keep me from making mistakes I know go against the path of the road to being consistent.

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CoachShane

Trader at Netpicks
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.
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