The Conundrum of Profit Taking

Filed under: Learn Forex Trading |

Many people say that professional traders do not let a winning trade turn into a losing one. In fact, in Alexander Elder’s well-known book, “Come Into My Trading Room”, he states that:

 

“You should moves stops one way—in the direction of the trade. When a trade starts moving in your favor, move your stop to a break-even level. As the move persists, continue to move your stop, protecting some of your paper profits. A professional trader never lets a profit turn into a loss.” (p.136)

 

While this seems to be good advice on the face of it, there is no indication of parameters. This creates a number of problems. If you place your stop loss too tight, then your stops will easily get hit and your losses will be far bigger than any profits. Therefore, I am still on the fence as to whether a set and forget system is better or worse than a system that uses trailing stops. Perhaps an ATR stop makes more sense, as this takes into account the volatility of the market.

 

Another option is to move stops to break even. But again, when do you do this? Do you use an arbitrary figure, like when you are in profit to the same amount as your potential loss, and then you move to break even? This again may not allow the market to breath, so your market edge could be lost. It is a difficult choice to make.

 

Saying that ‘A professional trader never lets a profit turn into a loss’ seems like a pearl of wisdom on the face of it, but this is not strictly true. A professional trader does not go to breakeven as soon as the trade moves in their favour. If they did this, they would be stopped out on almost every trade and take a fair few losses as well. This advice is not to be taken literally, but fined tuned so that the market can breath and your capital is protected at all times. I will leave that with you – but one thing is for sure: it is certainly something that needs to be thought about by all traders.

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