Last updated on April 14th, 2020
Taking trading profits when they’re available is perhaps the biggest dilemma that a trader faces.
Take your profits too soon and you could leave too much money on the table.
But if you miss the boat, you run the risk of your paper profits evaporating or even turning into a loss.
There is no perfect time to bank your profits but how you will eventually exit must be part of the overall trading plan.
Exits are usually an ignored topic
Many people simply focus on the trading setup and how to enter the trade thinking that is the most important piece of the equation.
If you have ever taken time to read about the trading legends or any reputable trading book, the entries are the least important aspect of the trading plan.
Thinking of trading as being an exceptional risk manager first, we can’t help but plan where to exit our trade.
Without knowing, we can’t even calculate a simple reward to risk scenario for the trade.
Are entries important?
Of course they are but they are usually less important than you think.
There are many scenarios where you will want to just get the trade on and mitigate the risk through proper position sizing and of course your trading exit.
Looking to take a continuation move in a trend is a great example of just “getting the trade on”.
Small Trading Profits
You’ve entered a trade and the market has moved favorably in your trade direction but if you haven’t got a pre-planned exit strategy to take profits then it’s probably going to end up being a wasted opportunity for you.
Remember though, it’s near impossible to get your exit (or entry) perfect even if you’ve done all the right things.
But without a plan of how to exit your trades properly and book your profit, every decision can have a degree of subjectivity to it – and this is when a trader can fall prey to overthinking a situation and emotional uncertainty.
Both missing the moment you ‘should’ have exited a winning trade and taking needlessly small winners, can have long-lasting emotional repercussions.
The uncertainty of not knowing which decision will be right can bring back the past pains of seeing early exited trades continue on without looking back and having big winners turn around and end up losers.
We will never know the right decision until some time in the future after we’ve made the decision.
1. Big winner turns into big loser
This isn’t a nice feeling as I’m sure most traders will attest to. Having a big winner come all the way back and either turn into a scratch or even a loser is a painful experience, particularly if it wasn’t part of your plan.
It can induce a feeling of regret over trading profits that weren’t realized and can lead to a trader acting more quickly in taking their profits in the future.
2. Snatching at profits
Through the adverse experience of a big winner becoming a loser, the trader then starts to prematurely snatch their profits before the market has realistically given them a good reason to exit their winning trades.
Inevitably they see more and more of their trades continuing way past where they have exited. This tends to leave a trader feeling foolish and wishing they had the huge winner that they ‘should’ have had if they’d just managed the position ‘correctly’.
3. Rabbit in headlights
Without a proper pre-planned exit methodology, experiencing the consequences of both holding onto a trade too long and watching the market thunder past your premature exit, leads to a feeling of uncertainty.
The uncertainty of not knowing what the correct course of action will be in order to avoid a negative outcome (and of course, achieve a positive one) can make a trader freeze.
Taking an early exit has led in the past to poor outcomes and so has holding on to a trade.
So a trader can face a situation where they have a position that’s printing positive, but in terms of whether to exit or hold on a bit longer, neither choice is preferable – and this in itself contributes to choking at the most important moment.
Being Decisive is Vital
Acting decisively when sufficient information is available is a key attribute of successful traders.
If you have the right information and the market meets your criteria for an exit, then that is exactly what you should do.
Having a pre-planned method of exiting trades before you take them can help you to avoid errors and assess how effective the method really is.
Trading Profit Taking Examples
There are many ways that you can take your profits and one big reason why our customers love our trading systems is they give you a few ways to exit your trades.
1. Target levels
- Fixed target – exit trade at a set number of ticks, but needs to be based on the behavior of the specific product you are trading.
- Dynamic target – this can be based on the size of a setup or generated as a retracement/extension of an important swing for example.
- Market levels – using market support/resistance levels as profit targets for your trade can be a good method if the levels you are using are found through a consistent method taking into account the structure of the markets.
2. Profit stop triggers
- Trailing stop – Market levels (think swing highs/swing lows), trend lines (be consistent in their usage) or moving averages can all be valid places to exit if the market reverses back through them.
- Reversal activity – Exiting a trade on specific reversal activity can help you to get yourself into better synchronicity with the market. A strong rejection of an important price level can be a good cue to exit for example.
3. Flexibility of size
The flexibility that trading a greater number of contracts gives you should not be underestimated.
- It gives you a number of options for your exit – and this is extremely important as no trader has the ability to get out at precisely the point the market turns on every single occasion.
- The nature of scaling out of a trade for profit means that risk diminishes very quickly.
Let’s look at a hypothetical trading example.
Buy 3 contracts of NQ @4170.00 with a stop of 5 points.
Your risk on the trade is $20 per NQ point x 5 points x 3 contracts = $300.
If you take 1 contract off @ +3 points, your risk on the trade falls to $20 x 5 points x 2 contracts minus $20 x 3 points x 1 contract = $140.
This is less than HALF your initial risk.
The equivalent entry to take into account the new risk is now @4168.50.
If you take another 1 contract off @ +6 points, your risk on the trade is now $20 x 5 points x 1 contract minus $20 x 3 points x 1 contract minus $20 x 6 points x 1 contract = – $80 assuming you don’t move your stop.
That means your trade will be up $80 if the market comes all the way back to the initial stop. The equivalent entry is now @4161.00 if you were to scratch the whole trade.
Taking Your Trading Profits When Available
Don’t watch good trading profits vanish into thin air – make sure that you take something when you have a trade well onside.
Trading is a marathon not a sprint and whilst taking smaller profits (not small) will reduce the size of your winners, it will improve your consistency and this is what will make you successful in the long run.
A smooth equity curve leads emotional stability as a trader and to bigger size.
No matter what you do as a trader, unless you have a consistent approach for taking profits, you are likely to struggle. And remember, until you make that cash register ring your profits are not real.