Taking Profit and Stopping Out of a Trade

Taking Profit and Stopping Out of a Trade

At the most basic level, every trade ends with either a profit or a loss. Certainly, some trades end unchanged, i.e. when you exit the trade at the same price you entered, which does not result in a profit or a loss. However, most of the time, you will deal with the pain of being stopped or the ecstasy of making a profit.

Take profits too soon or not at all
Taking profit is usually a positive experience for most traders. But if the market continues to move in the direction of your trade after you square off and take profits, you may start to feel like you are losing or even losing money.
This is where traders may start to fear that they have made a profit too soon. The emotional component can become very powerful, and your past trading experience can begin to color your current thinking. The alternative is usually not to take profits at all, which ultimately exposes you to ongoing market risk.
The important factor to remember is that you are making profits based on your trading plan, whether it is based on a technical level reached or an event that is being executed. You identified a business opportunity and went with it, so enjoy the fact that you have something to show for it.
And do not covet. No trader ever captures 100 percent of any price movement, so keep your gains in perspective and remember: the market isn’t there to give you money. This is why it is called profit making.
Above all, avoid making rash trading decisions after taking profits. The market may continue to move in the direction of your previous position, and you may be tempted to re-enter the same position.
In some cases, getting into the same position may be the right thing to do, but until you reassess the market objectively and without the emotional burden of being right previously (but not as right as it might have been), you risk overstaying your welcome your.
Also, avoid the urge to take a sudden stance in the opposite direction. If you are in a short position and prices move lower, for example, and your analysis and strategy leads to a buyback of that sale, you may be tempted to enter into a long position.
After all, if you’re right that prices are going down, and you’re now buying back your position, then it makes sense that the market would start to go higher – otherwise, why buy now? But this trade is another trade entirely and not the trade I identified earlier.
Treat each trade individually, and realize that the outcome of one trade has no effect on the next trade. Instead, take a step back and reassess the market after you regain the objectivity that comes from being a square.
Partial take profit
One of the ways in which traders can stay in the market with a profitable position and hold on to a larger potential move is to take partial profits from the overall position. Of course, partial profit taking requires the ability to trade multiple contracts – at least two. The idea is that as prices move in favor of your trading position, you get the profit from only a portion of your total position.
For example, you might have bought 15 mini contracts with a total deal size of 150,000. If prices start to rise, you may sell parts of the total position, make a profit on part of your position, but keep the rest if prices keep moving in your favour.
If prices reverse course, this means that you have reduced your exposure to the market and may still have a profit to show in the overall trade. If prices continue to rise, you can continue to take profits until your position is completely closed.
When you take partial profit, you need to adjust the size of your stop loss orders and other take profit orders to calculate the reduction in your total position size. Some online brokers offer a position-based order entry system, where your order size is automatically adjusted based on any changes to the overall position.
Depending on the jurisdiction you are trading in, partial position closings may be handled differently. In the US, forex providers are required to account for your trades on a first-in, first-out (FIFO) basis.
For example, if you buy one lot at 30, one at 20, and one at 10, you are long 3 contracts with an average of 20. It was first purchased in the 30’s. In most other jurisdictions, you can choose the individual lot that you want to close.
There is practically no difference in the margin balance between the two, but some traders like the idea of ​​closing the lots with the most profit. The key here is that you hit a position, and the market needs to reverse your average to make a profit under either system.
If you make profits only from those stakes that are in the money, you are still exposed to a loss from those that remain out of the money. If the market has not completely reversed, it means that it is still moving against you, and you will need an exit strategy.

Stop before things get worse
As part of any trading strategy and to conserve your trading capital for future trading, you always need to decide where to exit a trade if the market does not move in the direction you expect. Spend as much time and energy setting this level as you like, always keeping in mind that a lot of short term price movements can be triggered by stop losses.
Expect that key technical and price levels will be tested to see if stop-loss or market orders are in place. Test levels are what trading markets spend a lot of time doing. For this reason, we like to take into account the margin of error in placing our stop orders, based on the individual currency pair and the current market environment.

In our experience, no one is ever happy when a Stop Loss order is triggered. The fact of the matter is that stop losses are a necessary evil for every trader, big and small. You don’t know in advance where price action will stop, but you can control where you exit the market if prices don’t move as you expect. Most importantly, stop losses are an important tool to prevent controllable trading losses from turning into huge losses.
No trader is right all the time, so downtime is simply part of the reality of trading. Traders who implement smart and disciplined stop-loss orders can sometimes suffer setbacks, but they will avoid eliminating them, and they will still be about to trade the next day. Traders who fail to use stop orders, or who move them to avoid triggering them, risk exposure if the movement is large enough.

Trailing stop losses for larger price movements
The only type of stop loss that traders might enjoy seeing activated is tracking stop loss orders, which are often used to protect profits and enable traders to capture larger price movements.
Trailing stops are not a sure guarantee that you will be able to stay on board for a larger directional price move, but they do provide an element of flexibility that you should keep in mind when adjusting your trading plan.
For example, if your position is in the money and sticks beyond the level of a significant technical breakout, you may want to consider adjusting your stop loss to a trailing stop loss whose starting point is on the other side of the technical level. If the hack results in more sustained movement, you’ll be able to capture more than you would otherwise. If the breakout is reversed, the trailing stop loss will limit the damage.