A profit-taking strategy is an important component of the trading process that many traders are unaware of. Knowing when to exit a trade when it is profitable is one of the more difficult tasks for traders and investors to grasp.
This is why novice traders must grasp what a profit-taking strategy is and how to use it in their trading.
Profit-taking tactics decide when a trader should quit and collect gains or cut losses. To be effective, these approaches must be used with additional risk management tactics, such as position sizing techniques, to keep you on track during your trading trip.
We will define profit-taking methods and discuss how some of the top profit-taking tactics may help you improve your trading.
What exactly is a take-profit strategy?
A profit-taking strategy specifies how you will unwind your open trades and maximize your earnings from them. To achieve this result, traders employ a number of profit-taking tactics.
Some will close their position all at once, while others will attempt to close their position in stages as it swings in their favor. Some traders may establish take profit objectives based on technical analysis, while others would employ a preset target (for example, in pips or $ value) or will go with their gut instinct (for example, if news affects their open position).
How do you come up with an exit strategy?
To identify an acceptable exit strategy, you must first understand your overall trading strategy and the type of trader you are. Trading on instinct is tough, and most traders (particularly novices) will benefit from having a well-defined strategy and trading plan available.
The strategy should include information on how you will decide your entry point, as well as your stop loss and take profit levels. Sticking to them is critical; otherwise, you risk allowing your losing positions to run wild in the hope that the market will eventually shift in your favor, while cutting your winning positions short because you feel obligated to bank that profit before the price swings against you.
Refer to our article on trading exit strategies to decide which sort of exit strategies are appropriate for your trading style.
What is the significance of trading with a profit target?
Trading psychology is one of the most difficult, if not the most difficult, aspects of trading to learn. Setting guidelines and having a clear strategy of what you want to do and achieve can help you develop consistency, discipline, and enhance your risk management abilities.
Take-profit and stop-loss levels assist you develop consistency and encourage you to stick to your trading plan. If things don't work out, it doesn't mean you should stop utilizing stop-and-take profit orders; rather, it means you should change your trading approach to arrange your orders more effectively.
Profit-taking Strategies that will help you improve your trading:
Now that you know why profit-taking methods are so crucial to include into your personal trading, let's look at some of the top profit-taking tactics.
1. Making use of trailing stops
Trend-followers frequently utilize this method to lock in profits when the market swings in their favor. A trailing stop is a dynamic stop loss order that moves with the price in your favor.
It moves with the price when the price is moving in your favor, but pauses and remains at the last level it reached when the price goes against your position – this manner, it locks in winnings.
There are several strategies for trailing profit. A trailing stop can be set at a percentage or a specific amount away from the profit.
However, several indicators have been discovered to be effective for tracking profit. The moving average is one of them. Many trend observers employ a moving average or a moving-average-based indicator, such as the Donchian channel.
The ATR (Average True Range), which measures volatility, is another frequent indicator for trailing profit. Some traders will trail their profit by one or two ATRs. Some traders employ fractals, shifting their stop loss to the next swing low/high from the current price level.
2. Exit strategies based on support and resistance
Another option is to establish a profit objective based on support and resistance lines.
If you detect a range-bound FX pair, index, or commodity, you could want to take advantage of the movement by buying weakness at the bottom of the range and selling strength at the top.
The accompanying chart depicts a range-bound phase in the NZD/CAD, during which the currency pair consolidated inside a 300-pip range. If you bought weakness on support, you might take a profit before the critical 0.89 resistance level.
If you received entry signals before the 0.86 support level, you might position your take profit level immediately before 0.89.
3. Exits based on time
Good trades generally start working in your favor right away or after few minutes. Some trades, on the other hand, will linger and do nothing for lengthy periods of time.
A time-based exit for an intraday trader might be as little as 10 minutes, but an end-of-day trader could tolerate five days of sideways movement before departing. You must devise a time-based exit strategy depending on your trading timeline.
This is one of the simplest methods to get out of a trading position. You depart after a certain amount of time, which might be minutes, days, months, or bars. A time-based exit is one of the most effective exits you can utilize since it is not excessively difficult.
Reduced drawdown is one advantage of employing a time-based exit plan, according to my experience. This type of exit guarantees that you only stay in the market for a limited amount of time and allows you to quit the market early if a bear market begins.
4. Using a set profit goal
Setting a profit objective is another exit tactic. This might be based on degrees of support and opposition.
For example, if you come across a currency pair, index, or commodity trading in a narrow range, you may wish to capitalize on the movement by buying the weakness at the bottom of the range and selling the strength at the top.
Some traders employ a predetermined dollar amount to attain the ideal reward/risk ratio.
Conclusion
There is no one profit-taking approach that is superior to the others. It all boils down to your trading strategy and approach. We've highlighted some of the most common profit-taking exits above and recommend testing which ones work best for you. By using any of them that best fit in your strategy, you are sure to take more profits than screenshots.