Poor target placement, lack of experience, greed, arrogance and stubbornness are all issues that can cause traders to not take profits off the table.

I appreciate this article may conflict with some of my core beliefs and teachings on taking profits since typically I encourage people to aim for a 2 to 1 risk reward or greater and to set and forget stops and targets. In theory, this makes sense, but in the real world, as you likely already know, there are still a great number of trades that almost hit your profit target or where a trade has moved quickly in the right direction and you’re staring at a giant profit… and then the next day or week, the market goes the other way and your once giant profit has become a much smaller profit or even a loss.

In today’s article, I am going to go over protecting open profits, and how to know when to take the money and run and trust your gut, and several other tips that will help you start booking profits and building your trading account as a result.

Should you take the money and run?

How many times have you gotten up a huge profit in a short space of time because the market popped in your favor right away? Well, it happens, but not as often as you (or I) would like. Yet, I find that traders almost always do the exact wrong thing in these scenarios…

If you know a fast and big move in your favor is relatively rare (usually trades take longer to play out in the market) then it goes to reason you should try to protect most or all of that profit when you have it. The way you do that is by trailing your stop loss close to the current market price, after the big move in your favor. This way, you secure most of the profit but you still give the market a chance to keep running in your favor. The alternative here, is watching price reverse and melt-away all your open profits.

Now, I know what some of you are thinking already: “But Nial shouldn’t I just set and forget like you teach?” Well, there is a time for set and forget trading and a time for actively booking profit, and that is the point of this lesson. We are all trying to make money from trading, so when you get up a big profit fast, it’s time to start thinking about booking it. Set and forget is more of a default trade-management strategy that you should consider your baseline management technique. In other words, set and forget your trades unless there is reason not to (like a huge fast move in your favor). Here’s an example…

Here’s another common scenario: there is no clear breakout (beyond a level) or trend in place, but the market moves a lot in a short space of time. In this scenario, you should also consider booking profits when they’re there. Here’s an example:

This chart was in a trading range and we see a pin bar buy signal formed near the bottom of the range. Now, in this scenario, it’s obvious you would look to book profit near the resistance of the range, but you would be surprised how many traders don’t. Instead, they will watch that profit evaporate because they ‘feel’ like the trading range will breakout and they’ll make even larger profits. This is greed at its ‘finest’. You can see what would have happened had you kept holding that trade, you would have probably lost money or at least made a lot less. Don’t try to predict breakouts before they happen; if you’re up a good amount of profit in a trading range, BOOK IT!

Now, if there is a strong trend and a clear breakout within that trend, you can look to trail your stop loss below or above a logical key or near-term level. You don’t want to hold onto the trade if the market comes crashing back through a level it just broke out from, this could end up being a false breakout, leading to a loss. In the example below, we can see price broke above a key level in the AUDUSD, so if you were already long from the pin bars marked on the chart, you would definitely want to trail your stop up from the pin lows to that key level or just below it. When you see an obvious breakout of an obvious level, view that as a good level to trail your stop to, because if price comes back through that level it shows the market dynamics have changed dramatically and your trade idea is likely invalidated.

Getting emotionally attached to your positions…

When you’re trade is up 2R or 3R and you don’t take the profit because you are only thinking about the profit you MIGHT miss out on if you close it out here, you are being greedy and illogical. Remember, the market is probably going to retrace soon (because markets don’t move in straight lines for very long), so better to book the profit while it’s there and then you can always wait and enter later, after the retrace. You’re in a better position if you take the profit because you have the money in the bank and you can still re-enter should the market pull back and give you a second chance entry opportunity, which happens often. It is not fun to watch a previously large profit evaporate…

The culprit is getting emotionally attached to your positions, you feel like if you close it out for a profit you’re somehow cutting your potential to make money. But this is silly! You can always enter again! However, once that profit is gone, it may never come back! Especially in the situations like those mentioned above, you need to book the profit when it’s there.

Ideally, before you enter the trade you will have some idea of your profit-taking strategy.

• If you are trading a volatile market that’s making large swings in either direction, be looking to book profits after big moves, don’t wait for the opposing swing to happen again and wipe you out.
• If it’s a strong trend, then you may elect to let the trade run for a while and trail your stop below or above obvious levels, etc. If there are no obvious levels then you can always trail your stop below or above the previous day’s high or low.
• If the chart is in a trading range and you buy near support, look to exit before or near the resistance, vice versa if you sell at resistance (look to exit near or before support is hit) – don’t hold on this scenario, book it!

The points above are examples of things you may include under your profit taking section in your trading plan. Don’t make strict / rigid rules you must adhere to, because this is futile, instead, write down some common scenarios and plan what the best course of action is for these scenarios and why, then when you are in that scenario for real, you just follow your plan, you don’t panic.

Conclusion

The psychology of profit taking is both fascinating and frustrating. More than anything, you should take way from this article the point that booking profits is almost never the wrong move. Obviously, most of the time you want to try and take profits that are 2 times your risk or greater, but there are times when holding out for a certain profit target is not the best move. You must be flexible and able to adapt to various market conditions to take profits successfully, and thus to trade successfully.

I would suggest you take the time to write out a profit-taking plan, and include various scenarios like the ones mentioned in his article and others you’ve found yourself in, and plan what you will do in those situations again. Markets tend to behave in the same general conditions; trending, consolidating, range-bound or meandering with no direction. Make a plan of how you will trade and take profit for each condition and you will be light years ahead of most traders already.

The original article is penned by Nial Fuller and can be read here.