One of the most successful traders of our time, George Soros, once said “It is not whether you’re right or wrong that’s important, it’s how much money you make when you’re right and how much you lose when you’re wrong.”
One of the biggest mistakes that new forex traders make is taking profit too soon and allowing losers to run. Hence, you often find that traders will have a 92%-win rate yet still blow their accounts. We have, over the course of our recent training syllabus, covered some strategies to take profit. Know your reward before taking a trade.
It is human nature to strive to achieve to set goals and that is exactly what the take profit should be seen as – a goal. You wouldn’t enter a running race without knowing the distance of the race and the same should be true when it comes to your daily trading. If you don’t know your take profit ahead of time, then there is no purpose to your trading, and the market can be prove an unforgiving place to be for a punter.
The most common way of taking profit amongst novice FX traders is to close the trade manually. This can be very rewarding but, in my experience, it lends itself to closing a trade too early – the obvious reason being that you allow emotion to dictate your decision. To eliminate the threat of making emotional decisions, it is advisable to determine your trading plan before you enter the trade. Allowing the price to trade through your take profit is something that is both simple and straight forward. The problem that most traders have is where to place the take profit.
Most forex traders are seduced to place their take profit at a set amount. Whether it be 50 pips or 100 pips. While this can potentially be a profitable strategy to employ, it also carries the risk of ignoring the market conditions. I always like to use my stop loss as a base to determine my take profit and I try and employ a 1:2 risk to reward ratio. This means that if I have a stop of 50 pips, I need a take profit of at least 100 pips. Once I have determined my stop loss, I look at key support and resistance levels and moving averages to determine where price may trade. If that level is not at least 2 times more than my stop loss, I don’t take the trade.
The final way to exit a trade is to employ a trailing stop loss. You are simply allowing your stop loss to move with the market. A lot of traders prefer to use this technique as their “take profit” as it caters for market conditions and allows for the maximum amount of profit whilst simultaneously continually reducing risk.
There is ultimately no right or wrong way to take profit. What works for you may not work for someone else and so it often comes down to trading personality. What cannot be disputed is that you can only benefit from using one of these methods to determine an exit price as by doing so, you will succeed in eliminating emotion from your trading.
High Risk Investment Warning: Trading foreign exchange and/or contracts for difference on margin carries a high level of risk, and may not be suitable for all investors. The possibility exists that you could sustain a loss in excess of your deposited funds and therefore, you should not speculate with capital that you cannot afford to lose. Before deciding to trade the products offered by BlackStone Futures you should carefully consider your objectives, financial situation, needs and level of experience. You should be aware of all the risks associated with trading on margin. BlackStone Futures provides general advice that does not take into account your objectives, financial situation or needs. The content of this Website must not be construed as personal advice. BlackStone Futures recommends you seek advice from a separate financial advisor. Please take the time to read our Risk Disclosure Notice.