A topic I have been researching a lot lately is taking profits during a trade. That’s right. Payin’ yoself! We’ve all been in the situation where we are in the money nicely and price just barely misses our target only to watch in horror as it comes back to entry and even potentially stopping us out. No, no, no, no, no. Can’t let this bastard take all that I had. Get fidgety and next thing you know, I click the button. Close trade for a tiny profit or break even. What the &*)$ the trade is now going back in the original direction. Shit. Don’t you hate that? So what do you do to avoid it?
Before you continue: I would say that I am proficient enough now at choosing the right trades to get into. Usually they do move in my favor from entry at least 60% of the time. The other 40% of the time, prices either reverse or go my way a little bit and reverse or consolidate more. So that means I am picking the right trades to get into when I stay disciplined on my entries. If you aren’t at this point yet, probably better you keep working on your entries and then focus on trade management when you get some trades going your way.
You’re picking the right trades and it always seems like you are watching in horror as you see profits running away from you, right before that target is hit. You don’t want to keep taking tiny profits and but you hate seeing your profits disappear.
Well, if you were like me, every technical book out there stresses – You need to set at LEAST a 2R target and anything less is not worth taking. Ok, true. You should only take trades with the POTENTIAL to gain at least 2x your risk. Don’t confuse the two. What do I mean? Well, you see a pullback coming, you want to short. The previous swing low is about a 2R profit away, so it’s reasonable to take the trade. Stop above the swing you just entered short on and we’re off. Except price lurches down, almost getting to that 2R, reverses sharply and you’re now sitting at a break even trade. Ugh. I can see the pain in your eyes.
What’s the solution? Well, I pay myself on the way. I stalked the trade, I made the correct entry and I was right about prices continuing. Why shouldn’t I take some home with me? So, regardless of what technical books tell you, I’m going to let you guys on a little secret that has turned me somewhat profitable swing trading and improving my day trading. PAY YO SELF (with certain requirements of course 🙂 )!
Let’s review conventional profit taking methods:
- Set it and forget it. The target is at 3:1, it either hits stop or target. For me, too strict, too arbitrary, and it just eats me up to see a trade miss my target by a penny and reverse for a full loss. I used to do this. Didn’t work. So, no go for me.
- Trailing your stop above or below the previous bar. So if you’re using 5-min bars, you just trail it down on a short above the previous bar’s high. Except for me, price always seems to “tap” me out and then continue on down. Then it feels like some troll is just behind a desk, stop searching. Again, not for me, usually.
- EMA exit. You put some EMA you like on the chart and ride the trade until prices touch it and you exit. Not a bad idea, keeps your emotions out of the trade as long as you stick to your rule and usually keeps you on the right side of the trade. But then again you can miss out on a lot of gains as you’re most likely taking profits at the end of the pullback.
- Pivot exits. You entered short, price is going down and you wait for the next pullback. Excruciating as that sounds, some patient people are able to sit through 3 pullbacks and take profit at something crazy like 8:1 towards the low of the day. You simply put your stop above the previous pivot/swing high or low and keep riding the trade up or down until it is hit. Requires zen-like patience and balls of titanium. Again, not for me.
- Into strength – a lot of those penny stock guys like to do this. You get a nice big spike and sell some of your profits before the pullback. Not a bad idea as usually after you get that nice surge, a pullback is underway anyway. Hmmm…
So what to do?
This is where you have to know yourself as a person to improve. Are you fidgety and hate seeing profits wash away, like me? You want to stay with the moves that are big but get out of the ones that are quick? How to know when which is which? You don’t! So, combine profit taking methods!
Usually with my swing trades, I do the following:
- 1/2 or 3/4 size at 1R or 1.5R. Here is where discretion is important. Price has reached your 1R and on the intraday chart looking faaaabolous for more. It is “spiking” on the daily. Wait. As soon as price starts sputtering on the 5 min chart, take off half or more (you are selling into strength). Usually you can milk out about a 1.5R doing this rather than the 1R. If you take off 75% at 1.5R, you will have a profitable trade even if your original stop is hit with the remainder and here is the most important part for people like myself. Or maybe price has been shitting around for 2 or 3 days right around your 1R. Take off 3/4 or half depending on how you feel about it continuing. No shame in taking some money at your initial risk. The little guy in my head saying “take the fucking profit, man, take it and run!” is happy and calm. It’s like I just gave him a fidget spinner. No longer can I lose on this trade. I am a winner. I like winning.
- If you want to move the rest to break even, go ahead. If not, you can’t lose money. Or you could even take off 1/4 should it go to break even. Never thought of that huh? Yeah, put a stop at break even for 1/4 and the last 1/4 at your original stop. You do it on winning trades, why not on trades going against you? That way if it does barely stop you out at break even and start moving for you again, you can’t sit there screaming WTF@#%. You’re still in the game!
- Since you just paid yourself the risk you took on for the trade, you can now be a bit more patient with the last half or 1/4. Here is where you can switch to a different method that is used to squeeze more out of the trade. I’d say a higher EMA (20) and pivot methods are better for staying patient and riding the trade. Trailing behind previous days is a bit spaz if you already took profits and selling into strength you probably already did when you took your first half off. Unless you get another day or two of nice momentum movement, then trailing below the previous day is not a bad idea.
- Price is moving along nicely. You are now up to like 3-4R on your second half. Prices are pulling back to a lower EMA like the 10 (a decent place to take profit on the impulse wave which is probably beginning to pullback). Wait, don’t cash out just yet. Take off 1/4 of that now, let the other 1/4 ride as a set it and forget it (where you can sometimes really cash in). Put your stop to break even and let that last 1/4 go until a target is hit that you set (52 week high, previous swing high, whatever) or your stop is hit.
Note the limit for taking profit is always at least 1R. Do no start taking some off the table if price is just barely in your favor. That guarantees you to be a losing trader.
So you get to combine all of the methods into one just for you. You can be spaz and take off some quick and zen Buddha at the same time and let some ride till the end.
I’ve had so many trades this past month basically only give me step 1. Maybe 70% of my winners. But if I hadn’t taken off some at that point, I’d be a net losing trader right now. Would letting those 30% that went beyond step 1 in a full size position made me more profitable? Ehhhh, maybe, maybe not. I should probably do the math, but haven’t. And here is the reason why: I would’ve definitely lost my sanity and probably gone into “shit %^$# mode,” and start making undisciplined trades if I had so many losing trades or winners turn losers. So very important.
I am now trying to implement something similar in my day trading. Things move much quicker and it’s tough to decide which method you want to use with which trades. I’m still ironing it out, but I think this is the closest to the “holy grail” you will get and once I can implement the trade management that suits my personality on a regular basis, I will be profitable day trading.
So try it out. If you are still losing money, your entries aren’t good. If your entries are good enough to go at least 1x (setting a low bar, but that’s how I like it) your risk, you can make money Take a look at your past trades and make the assessment. Are most trades you get into going against your sharply? Practice entries. Are trades you enter, doing well and then reverse? Change your trade management.
And for me, it took probably a solid 6-7 months before I was making “good” entries, and I am still improving. So don’t be upset if you aren’t at that point yet. You need a setup, trigger, assessment of the trend and chart, etc. but that’s a whole different topic. Once you master getting in, you gotta master cashing in.
Happy trading ya filthy animals.