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Ever wondered how to take profits in Forex? It can be a tricky question to answer, as there are many techniques taught online about profit taking.
One such technique is to take the full position off in one. Another is to scale out of the position in pieces. Alternatively, a position can be left to run with a trailing stop loss – meaning the trade only closes when the price triggers the stop loss.
To make this article useful and interesting, I will walk you through the take profit strategy I have always used.
My take profit strategy
The good news is that my take profit is very simple. I take all of my position off at once. I do not scale out, or take a little bit off while leaving some on. The reason is simple – I make more money exiting the whole position.
The truth is, banking pips on a regular basis is the route to making consistent income. It is also the dominant strategy taught inside the London based trading firms that I used to work for.
Apart from giving you regular income it is also much easier from a psychological perspective. If you suffer a lot of losses in a row, it will start to make you feel like it is impossible to make money from trading. Furthermore, holding out for bigger gains will naturally lead to more losses.
My profit targets
Some resources suggest setting a specific profit target for trades. I don’t think being this specific is necessary. To give you an idea, my average profit target is around 30 – 70 pips on an average trade.
If I’m trading longer term, then I’ll look for targets based on expert views and market expectations. As such, this may result in larger targets of a few hundred pips.
You can usually find these views by monitoring news articles and comments from central banks. A good example of this comes from 2013, when the Bank of Japan announced quantitative easing. They stated they would continue to devalue the yen until USD/JPY hit 1.10. This made identifying a profit target a much simpler task.
Defining exit points is a critical skill in Forex trading. I don’t actually have a mechanical strategy for exits – but I do pay close attention to support and resistance levels on a price chart.
If you’re unfamiliar with support and resistance levels, just think of them as important psychological levels for the market.
Support & resistance
A support level can be described as a price floor for a currency pair over a specified timeframe. That’s to say it’s the lowest price a currency pair has dropped to in a set period of time. Usually, as a currency pair approaches a support level, traders tend to buy the pair.
Meanwhile, a resistance level is simply a price ceiling. It’s the opposite of a support level. It can be described at the highest price a currency pair reaches over a specified timeframe. As a currency pair approaches a resistance level, traders usually sell the pair.
In the below candlestick chart, you can see I’ve identified points of support (red line) and resistance (yellow line) over a one hour timeframe on USDJPY.
Through these explanations, you’ve hopefully noticed that these support and resistance levels are natural areas to exit trades.
It’s important to note that support and resistance levels can be broken. When this happens, there’s usually a significant reason for it. By using fundamental analysis, you should be able to identify these reasons.
My approach to exiting trades
I normally look for very recent areas of buying or selling on the 15-minute timeframe or even the one-hour timeframe. If there is no clear level on these timeframes, I will check the 4-hour timeframe. The point of this is to identify places where the market has already bought or sold from recently. The idea is that if the price gets back to these areas then the market could very well start buying or selling again.
In practice, If I’m buying a pair I will then look to take my profits at the most recent area of recent resistance from which the market sold. Remember, I’m expecting price to go up. So if it reaches a level where it could start selling from again, then this is a good signal for me to just take my pips and not risk the market moving against me.
The process is simply reversed for a sell trade. I’ll look for a strong level of support to take my profit at, rather than risk the market buying it back up all the way to my entry point.
So while my strategy for exiting trades is not mechanical (i.e. no set number of pips), I do have a clear system for identifying what kind of areas I believe it will be best to exit the market.
And these are based on me trying to avoid moves that could play out against my trade from established levels. The nature of this style generally leads to the targets being in between 30 and 70 pips on the average trade. There is also scope for longer term trades if I see a strong opportunity. The targets for these will be loosely based on general market expectations.
How to take profits in Forex
There’s nothing particularly complex about taking profits at the optimum points. It’s just a matter of practise. As a starting point, I suggest you try and emulate my take profit strategy on a demo account. Once you’ve used successfully a few times, try it on your live account.
I hope you have found this article useful. If you have any questions, please leave them in the comments below. I’ll try to answer as many as I can.