Education

How to make sure that you take all your profit

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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