“To Profit Take, or Not to Profit Take?” That is the Question…

Filed under: Learn Forex Trading |

For today’s forex-related article, I am going to take a look at the issue of profit taking. Now you may think “well of course we should take profits!” but that is not quite what I mean. By ‘profit taking’, what we mean with regards to forex trading is the conundrum of whether we should reduce our position once the trade moves in our favor. Let me explain in more detail…

 

Let’s say that you put on a long position on the GBP/USD forex currency pair. You set a stop loss and risk 100 pounds, and to do this, you have to buy 0.5 lots. You have a risk-reward scenario of 1:2, so your target is two times your risk at 200 pounds. Now, let’s say that your trade moves favorably and you are 100 pounds in profit. Do you leave the trade alone in a set and forget type strategy, or do you take some profits? If you leave it alone, you risk losing your current profit of 100 pounds, and an additional loss of 100 pounds, so that you can make another 100 pounds (you may need to read that again!). So you are in effect risking 200 pounds in order to make a 100 pounds profit at this stage. If you move your stop loss up to breakeven, then this gives the trade less room to breath, which is not a good idea as you will have a lot of trades going breakeven. But there is an alternative…

 

What you can do is take a part of the profits, and let the remaining slice of the pie run. In this situation, you could take, say, 75% of the lots off as profit. So you would have 75 pounds profit, and 25 pounds exposed. So the worse that could happen if your stop loss gets hit is that you would make a 50 pounds profit.  And if your target were achieved with the remaining 0.125 lots, you would make a total of 125 pounds profit. What you would achieve by taking this strategy is making your overall equity chart less volatile. Whether you would make more profits in the long term, I don’t know. My gut tells me that it would work out about the same. But your nerves may be significantly less frayed – so it is something to think about.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>