We have a question from a new subscriber who says they are really having a hard time knowing when to take profit on their trades, they’ve tried many different methods and just can’t seem to find one that works, they either take profit way too early and see the market move without them or they end up holding on to the trade too long and get taken out at breakeven or worse a loss, any tips that can help.
So, thanks for the question, and the first thing I would say to you is you are definitely not the only trader to go through this struggle, because getting the analysis in tip top shape is one thing, but getting more accurate with your entries and exits can be a bit more complicated when you need to account for changes in the sentiment or changes in the fundamental bias etc.
So, there are a couple of things that makes taking profit easy. The first profit taking scenario is when you are in a trade and something happens that makes your trade invalid. So imagine you are trading risk off sentiment for example and you are selling the AUDJPY, and suddenly something huge hits the wires that immediately changes the risk sentiment, that is always the easiest way to just close your trade immediately no questions asked, once the premise for the trade changes and the reasons for entering are no longer valid then get out.
Now apart from those obvious times, how can you go about finding a balance between taking enough profit and not leaving too many pips on the table and between taking profit too soon and risk losing out on more?
For me, this balance comes down to a process. You see, for me, I find that the easiest way to get around this challenge and find balance is to establish a process that works for me and then to make sure that I stick to that trade plan.
The way that I prefer to do it, as you might have heard on many of the videos is by taking more than one clip on a trade, so for example if you are risking 1% on a trade, instead of taking one unit a 1% I prefer to take 2 or 3 clips at 0.50% if it’s two or 0.33% if it’s three clips. And the process that I have found works the best for me is taking of gradual clips as I reach key areas of support and resistance on the charts, I like using the basics for this like important psychological price levels or important swing points or support and resistance areas and even more useful for me for short-term trades like day trades is just using good old fashioned pivot points.
And my trade plan or process with this is simple, whenever I enter a trade my first, second and possibly third target I aim for is always the next significant technical level on the chart, so if I enter at the daily pivot and I am selling I will target the S1 pivot, or if I enter at the daily pivot and I’m buying then I would target the R1 pivot as the first target, and then based on where the next key technical areas are like psychological levels or swing points etc I will just take those units off at those next areas, and my additional process with this is that the moment I have taken profit on the first unit I usually move my stops on the remaining units to break even.
For some that is really counter-intuitive because from a statistical point of view you actually put the odds for further profits against you by possibly moving to breakeven too quickly, but I find this process works for me and the golden rule for me to deal with the emotional stuff is that I don’t deviate from my process unless I have a really good reason to do so.
A good example of when I would deviate with a good reason, is Nat Gas, we had a trade we took as part of our trading challenge in September on Natural Gas, now on this trade we entered somewhere in the 2.80 area the idea with this trade was slightly longer timeframe expecting upside for many various reasons, now I took off this trade not because of the sentiment changing or even reaching close to the profit target, I closed it because my cost of carry on this trade was just ridiculous, I didn’t really the carry over or swap on this was so high until I saw that after a few short days in the trade I had already taken a 0.4% loss on the trade and the price was basically at the entry, so in that scenario if I have a reason to deviate from my process I would.
But apart from that, my rule is that I stick to that process and I ignore what happens afterwards. What I mean by that is that I stick to the execution and exit plans, and even if the pair of the instrument ends up running another 1% or 2% after I exited the trade, I’m not going to complain about it and sulk about it and feel that emotional pain of missing out on those additional pips, because there is just no way of ever knowing how far the trade has still left to go.
Even with all the chips in your favour, you still don’t know with 100% certainty how much more is left in the tank, and the way that I make peace with that is having a process that handles my entries and exits the same way.
It’s a lot easier on the emotions, because you follow the process and stick to that no matter what. That way you are not shooting from the hip from trade to trade, basically feeling out where you might take it off or not, I think that is dangerous, especially for beginner traders because you open up yourself to so much ambiguity that, I think it’s easier to just have a specific exit strategy and then sticking to it, whether it ends up running 5 pips or 100 pips the strategy helps you take a more systematic approach that will save you a lot of headaches in the long run.
So, I hope the video has been helpful, and if there are any more just let us know.