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How to Take Profits when Trading

Many beginners have a common mistake in trading once they just come in the financial markets. They close profitable positions, being afraid of wasting the current profit even though it’s a small one. At the same time, they keep holding positions with current negative result hoping for the market to reverse and come back to the entry level or even in plus. That’s a completely wrong approach as traders put risks on a bigger scale compared to profits. Moreover, leaving negative positions is extremely dangerous as the whole trading account could be lost in case if those deal accelerate the current trend in the wrong direction. Experienced traders usually do completely the opposite. They hold profitable positions in order to maximize profits, while they cut losing deals as early as it is possible, pre-setting stop-loss defensive orders before the deal is opened. Traders should be acknowledged about what is the potential loss while the profit/loss ration should be as large as possible. They know that there is a reason to enter the market only if the target profit is much higher than possible loss. This article is dedicated to only one part of the money management strategy - taking profits. We’ll try to explain why beginners usually exit from profitable deals too early and why they should not do so.

The psychological background of any mistake in the financial markets is based on three negative emotions - fear, greediness and silliness. The first one - the fear - is exactly the reason why beginners close profitable positions too early. They are simply afraid that the current profit might turn into a loss in case if the trend reverses and goes in the opposite direction. Many psychologists determine such kind of fear as a fear of lost opportunity. The main thought is like ‘oh, I have a current profit, I would better take it now, even if it’s too small, rather than wait longer and get a loss instead’. But do they manage their emotions at that moment, asking the logical part of the brain? No. What does fundamental and technical analysis say? Was there any news or macroeconomic report to have a reversing impact on the price? No. Is there any technical resistance/support level, which is supposed to hold the price from moving further in the right direction? Is there any divergence on a technical indicator which points to a sudden reversal? The answer is no. Beginners do not know how to deal with their emotions and that’s the key reason for closing profitable positions too early.

Next, many educational courses and books tell that taking profits is not a mistake, even it’s too small. That’s like folding in poker is not a mistake at all. But tell me please, do you know anyone who won a huge poker tournament with only folding? The answer is no, again. The same story is applicable to the financial markets. You’ll never make money here if you take profits too early. Profits must be planned and maximized. Before opening any trading position, or before starting a trading cycle, traders must assess what is a potential target for this particular asset? What is the fundamental background for buying or selling this financial instrument? How far traders can lift this currency pair or commodity price? What is the technical outlook on different timeframes? What is the target range for this price? All those questions must be answered before pulling the trigger.

Once you’ve entered the market and set stop-loss defensive orders, as well as take-profit orders, you should stick to your initial plan. Executing trading algorithms and plans is extremely important for the overall profitability. Holding profitable positions is a tough task for the emotional part of trading, as the human brain is always trying to warn that it’s better to have something instead of losing all. But one simple question might help traders to deal with the emotional part in this particular case. Did something change compared to the preliminary plan? If yes, then trades have to consider changing the initial trading plan, depending on how crucial is that change, whether it’s significant and meaningful. But if there were no changes in both fundamental and technical conditions, then why should you kill a chicken which brings you golden eggs? That’s silly.

Of course, there is a huge difference between the trend’s reversal and consolidation before continuation. Traders will have to gain enough experience to be able to understand that difference and act accordingly. In addition, traders would gain a feeling of the market after some time and the best practice for that is to simply watch the market and monitor several assets in the scope of their behaviour. Trading with demo account helps too but it’s even better to start a real account with a small amount than a demo just because real money is not fake figures on the screen and managing emotions is crucial for the profitability. In addition, there are several options for traders who would like to secure at least some profit. For instance, there is an option of trailing stop order or traders can just manually move stop-loss order in the profitable zone with the price. For example, if you bought EUR/USD at the exchange rate of 1.1200 and it moves in the right direction to 1.1300, you can easily shift the stop-loss to 1.1250, making sure that you’ll get at least part of the profit in case of a sudden reversal or some unexpected event. Once the price goes up to 1.1350, you move the stop-loss order toward 1.1300 for another 50 pips, enlarging your minimal secured profit. Remember, there is no easy money anywhere, especially in the financial markets. There will be negative positions with losses from time to time. But the main target of a trader is to maximize profits in order to cover those losses and get into the overall profitability at the end of the week, month and year. Taking profits too early would not help you to achive that goal.

How to Take Profits when Trading

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