Profit Taking: An Illustrative example

Filed under: Learn Forex Trading |

 

There are many ways of profit taking when trading the forex markets, and today, I am going to illustrate one possible method for taking profits. Of course, you do not have to profit take, and many people prefer a set and forget strategy so that they do not have to keep watching their trades once they are in play. However, there is one way of profit taking that does not require you to watch the trades as they play out.

 

Let’s say that you have a risk-reward scenario of 1:2 on every trade that you make. Rather than letting either your stop loss or your target to be hit without doing anything else, you could choose to take some profits on the way.

 

One of my more conservative methods is to break the trades up into two parts (and in fact put on two separate trades with different targets). 70% of the total lots that you trade will be taken off the table once you are in profit equal to that of your risk. So if you are risking $100 in total on the trade, then once the trade is in profit by $100, you will take $70 in profit and let the other $30 run. This could end up in two possible scenarios. You could reach your target for a grand total of $130 profit, or your stop loss could be hit. But since you already took $70 in profit, you will still make a profit of $40 ($70-$30 = $40). What this approach does is sacrifice some of your potential profits, but at the same time, it limits your risk and your drawdowns. It is a much more conservative approach that might be best used when trading with higher sums of money. It also makes for a much smoother equity curve. There are many ways to take profits as your trades move in your favour, and this is just one of them. But it is certainly something that you should give a great deal of thought to.

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