The Conundrum of Profit Taking

Filed under: Learn Forex Trading |

One of the most important decisions that a forex trader will make in their career is whether or not to subscribe to profit taking; and if they do, they will then have to figure out when and at what levels this profit taking will be done. It is a difficult question.

 

For a while, I have used a ‘set and forget’ style system, whereby I let my stop loss or target get hit no matter what, and I didn’t meddle in a trade once it was on. One of my main reasons for doing this was a lifestyle choice. Perhaps the main attraction for trading forex for me personally is that it doesn’t take too much of my time and I am free to do other things. However, this is only the case in set and forget style systems whereby you don’t have to sit at your computer all day monitoring the progress of your trades.

 

However, I realized that as one day my ambition is to trade larger sums of money, then I might have to later change my strategy and be a little more conservative and increase my win rare. Therefore, rather than doing this later, I felt it would be better to create a system now that I can stick to indefinitely, no matter how large my trading bank is. Therefore, I have created a set and forget system that also incorporates profit taking – thus getting the best of both worlds.

 

What I am currently doing is to split my risk (of 1% of the bank per trade) into two separate set and forget trades. 0.7% of the trade has a RR of 1:1, and the other 0.3% has an RR of 1:2. What this essentially does, is to lock in some profits at the 1:1 RR area, and let the other 0.3% run to either the stop loss or the 1:2 RR target. This might seem little confusing, so let me illustrate and close today’s article via a quick example…

 

BANK = $10,000

 

Trade with 1% overall risk of $100.

 

Stop loss = 200 pips

 

Lots to trade = 0.5 lots

 

Split the lots into a 70/30 split

 

So… 0.35 lots with a target of 1R and 0.15 lots with a target of 2R.

 

Possible outcomes:

 

1)    Stop loss hit: $100 loss

2)    1R reached and stop loss hit: $40 profit

3)    2R reached: $130 profit

 

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