How to make sure that you take all your profit

Author: FBS | Category: Education

Tips for taking profits

Tips for taking profits

Trading is a game of patience and mental resilience. If you want to get your pips of profit from the market, you need to be like a hunter: determine the exit levels in advance and stay on a stakeout until the market settles the bill.

A feather in the hand is better than a bird in the air. That's why we have a positive opinion about take profit orders in general. You never know whether the market will be able to give you more, so it's necessary to place a TP somewhere and not to be too greedy.

Ways to find a nice spot for a TP

Different trading strategies imply different techniques of placing take profit orders, so we will review several options here.

Support and resistance levels

It's a simple but elegant solution. The most evident S&R levels (trendlines, previous highs and lows, Moving Averages, Fibonacci, pivot points, etc.) act as a magnet for the price. Billions of traders recognize them and tie their orders to them, so it's only natural that the price goes there.

Don't forget to check higher timeframes as there can be recognizable levels that are ideal for TPs. If several things point at the importance of a particular level, there are even more reasons to use it as an exit point.

In most cases, it's safer to be a little conservative and place a TP a few pips below the resistance and a few pips above the support. After all, S&R are not levels as such but more like areas. In fact, this piece of advice is good for other methods of locating TP as well. 

Fibonacci retracement

Fibonacci retracement and moving averages offered a good place to take profit in GBP/USD long. 

2. Chart patterns

Chart patterns (Head and Shoulders, Double Top and Bottom and more complicated ones like the harmonic Gartley and others) offer rather distinct guidance on where to put a TP. The best thing is that this guidance has a solid logical foundation. For example, H&S shows how traders gradually lose confidence in a trend.

This pattern attracts attention of many investors who are willing to trade the reversal. As a result, in the majority of cases, the price goes down as much as the height of the pattern and it often happens that a bigger downtrend follows.

head and shoulders

A H&S and a round level offered a place for a TP in EUR/NZD short. The market went further down, but that can offer ideas for further trades: there's no point in trying to catch all moves of the market in a single trade.

3. Daily scope

It's always necessary to judge the relative size of candlesticks on the chart to estimate the scope of the potential price movement and the time it will take to arrive there. The ATR indicator can give you a hand in measuring volatility during a certain period of time. Add the value of ATR to your entry point and you'll get your TP. Notice though that it would make sense to adjust it for the evident S&R levels you see nearby.

EURUSD chart

Daily ATR is 64 pips. With EUR/USD already up by 20 pips, it's possible to set a TP for a buy trade 40 pips away.

4. Your level of risk

It's a golden rule of trading: your potential profit in a trade should always be bigger than your risk. As a result, you can start from risk: if you have determined a specific stop loss, you can calculate TP using an acceptable risk/reward ratio. A classic solution is a risk/reward ratio of 1:3 (if a SL is 20 pips, the TP should be 60 pips). 

Intraday traders can use time TPs in order to have all trades closed before the end of the day. Although this approach is worthy of existing, it looks too detached from what's actually happening in the market, so it is not our first choice.

If you choose not to set TPs in advance and "see how it goes", then you can take cues from big candlesticks (they are usually followed by consolidations or corrections, so it can be wise to take profit right after them), divergence between the price chart and oscillators (as well as overbought/oversold oscillators) and the appearance of a signal in another direction. Yet, experience shows that if you are doing something more than scalping, it's wise to keep calm and set a TP.  

Conclusion

A poorly placed take profit can kill a brilliant trade idea. Don't underestimate the importance of this step in your trading and always make sure that you are acting in line with the rules of risk management.

The art of a good take profit is the ability to keep in mind several things (S&R, average range, risk/reward ratio) and find a TP position that would fit them all in a maximum possible way. Another critical thing: don't move your take profit closer to the entry price and fight the temptation to manually close a trade ahead of time: you should have trust in your initial analysis and planning. Otherwise, there will be no point in searching for a good place for a TP.

Remember that the market loves planning and precise execution - these are the vital elements of a sustainable profit. Good luck!     

This article was submitted by FBS.

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