A profit-taking strategy is an essential component of the trading process, here are 7 Best profit-taking strategies to enhance your trading. despite the fact that the majority of traders are unaware of its significance. One of the most difficult tasks for traders and investors to grasp is the concept of knowing when to get out of a transaction when they are already profitable.
For this same reason, inexperienced traders should familiarise themselves with the concept of a profit-taking strategy and learn how to incorporate it into their trading.
A trader may utilize profit-taking tactics to identify when they should quit a position and either collect their winnings or reduce their losses. These strategies, in order to be effective, need to be combined with additional risk management methods such as position size techniques, which will assist you in staying on track for the whole of your trading trip.
Following that, we will go into the specifics of what precisely a profit-taking strategy is, as well as how the most effective profit-taking techniques may assist you in improving your trading.
What precisely does it imply when someone refers to a “profit-taking strategy”?
A plan that specifies how you will unwind your open trades and maximize the gains that may be gained from them is referred to as a profit-taking strategy. Traders will use a wide range of profit-taking tactics in order to accomplish this result.
Some people may shut their position entirely at once, while others will try to close it in pieces as the situation improves. While some traders utilize a predefined objective (for example, in pips or $ value) or may follow their instincts (for example, if news breaks that impacts their open position), others are likely to base their take profit targets on technical analysis.
What are the steps involved in developing an exit strategy?
Before you can locate a suitable exit strategy, you need to first understand your overall trading strategy and the kind of trader you are. Only then can you begin to look for one. It is difficult to open and close trades based on a gut feeling alone, and the majority of traders, and novices in particular, will benefit from having a well-defined strategy and trading plan ready to go.
Your entry point, your stop loss, and your take profit levels should all be included in the strategy. Additionally, the plan should define how you will select your entry point. It is important to adhere to them because, if you don’t, you might end up letting your losing positions run wild in the hope that the price will turn in your favor after all while cutting short your winning positions because you feel like you have to bank that profit before the price moves against you. If you stick to them, you won’t make these mistakes.
Please go to our article on trading exit strategies to identify which kind of exit strategies you may be able to use and which are most suitable for the way you trade.
Why is it matter to trade with a specific profit aim in mind?
Mastering trading psychology is among the most challenging aspects of the trading profession if not the most challenging aspect overall. It is essential to establish guidelines and have a distinct strategy outlining what it is you want to accomplish and achieve in order to develop consistency, maintain discipline, and increase your ability to manage risks.
You may gain consistency in your trading and be encouraged to stick to your trading strategy with the assistance of taking profit levels and stopping loss levels. It does not imply that you should stop using stop-and-take-profit orders if things don’t work out; rather, it means that you need to alter your trading strategy to arrange your orders more effectively.
Best profit-taking strategies to enhance your trading
After having gained an understanding of the significance of profit-taking methods and why they should be included in one’s own trading, the next step is to examine some of the most effective profit-taking tactics currently available.
1. Trend following exits
Moving averages serve as the foundation for even the most fundamental of trading systems. Since indicators were first developed, one of the strategies that have seen the most active in the market is the moving average, which can be used to determine when to enter and exit positions.
The use of moving averages for your exits has the benefit of being quite straightforward. And if you’re looking for an exit that won’t take up too much of your time, the moving average exit is among the top choices you may make in this category.
Exits based on moving averages are most effective when employed in markets that are trending.
crossing of the 5 and 20-period simple moving averages as the exit point.
As can be seen in the chart that is shown above, the US500 index was moving in a very bullish direction throughout the first half of 2021.
The moving average of 5 and 20 periods provides an exit strategy that is as easy as it gets. You have to wait for the 5 periods (represented by the blue line) to drop below the
(shown by the maroon line) before you can leave the level.
As can be seen in the chart that is located above, it would have offered a respectable run on the US500, which would have given you an outstanding chance to make a profit.
The AUD/USD pair went through a consolidation phase when this form of exit became “choppy,” as seen in the chart that can be found above. Because there is now no pattern in place, this indicates that you are receiving exit indications more often.
And if you are utilizing the same signal to join the trade, then you will be being chopped in and out of the trade, which will result in a string of trades that end in a breakeven position or a little loss.
2. ATR trailing stops
ATR stands for Average True Range. When calculating the ATR exit, the volatility of the instrument that you are trading at the moment is taken into consideration.
When there is a lot of volatility in the FX pairings you are trading, it only makes logical that you should allow your exit greater freedom to maneuver.
When FX pairings are less volatile, however, a stop that is closer will perform better, enabling you to give up a smaller portion of your open earnings.
An ATR stop that follows the trend would place the exit at a point that is 2-3 times the daily ATR measured from the low of the day. Therefore, if one ATR was 30 pips, a stop loss equal to two ATRs would lag behind the loss of the day by an amount equal to 60 pips (2x 30 pips).
The exit point for a short-term ATR stop would be somewhere around 1.5 times the ATR from the low point of the day.
The preceding chart of Gold shows that the ATR for the period beginning in April 2021 and ending in the middle of August 2021 has fluctuated between the values of 17.70 and 31.37.
This indicates that during the most volatile era (during this time period), the price of gold fluctuated by roughly $31 per day.
The most significant advantage of using this exit is that it allows you to lower the likelihood of having an early departure by allowing the ATR to direct your leave.
During periods of strong volatility, your chances of being whipsawed out of your trade will significantly rise if you set your exit at a level lower than the market’s current price, say $10.
The attractive feature of this exit is that the ATR is computed automatically for you on a daily basis, and you may make use of the information obtained to modify your exits in a manner that is appropriate.
3. Using support and resistance for exits
Setting a profit objective that is based on support and resistance lines is another exit strategy that you may apply.
If you come across a foreign exchange pair, an index, or a commodity that is trading in a tight range, you may want to take advantage of the movement by buying the weakness at the bottom of the range and selling the strength at the top of the range.
The range-bound phase in the NZD/CAD currency pair is shown in the chart seen above. During this time, the currency pair consolidated inside a range of 300 pips. If you were buying weakness on support, you might schedule a profit-taking exit before the important 0.89 resistance level in order to maximize your potential returns.
Suppose you were receiving entry signals ahead of the 0.86 support level; in this case, you may decide to put your take profit level immediately before the 0.89 threshold.
4. Using divergence signals to exit your positions
When it comes to trading any kind of instrument, one of the most reliable indications you may obtain is divergence. There is a divergence in both a bullish and a bearish direction.
When the price makes a lower low but your technical indicator, usually an oscillator like the stochastic or RSI, makes a higher low, this is known as a bullish divergence.
Let’s say you bought the dip in USD/CHF in December 2020 and held onto your position until now.
However, a bearish RSI divergence appears on the Daily chart about the middle of March.
In this scenario, you may decide to get out of the trade based on the bearish divergence and before the correction gains momentum if you want to minimize your losses.
5. Time-based exits,
Generally speaking, successful trades will provide you with benefits very immediately. On the other hand, some trades will stagnate and accomplish nothing for lengthy periods of time.
Your time-based exit might be as little as ten minutes if you are an intraday trader, or if you are an end-of-day trader, you could wait for five days of sideways movement before getting out of the trade. Your trading period should serve as the basis for developing your time-based exit strategy.
The following silver hourly chart reveals a period of consolidation, which a trader with a short-term perspective would have found quite uncomfortable to wait through.
6. Candlestick exits
There are many different candlestick exits that you may use in your trading methods, and most of them have intriguing names.
Who wants to continue in a trade after it has formed what is known as a “bearish engulfing pattern” or a “black cloud cover”? Simply hearing the name of the organization should be enough to tip you off that things are not quite as they should be.
Your objective here is to get acquainted with the whole range of candlestick patterns and to test these patterns to determine which ones are appropriate for the time frame and trading strategy that you use.
A bearish engulfing pattern is seen in the chart that can be identified by the preceding green candle being swallowed up by a considerably larger red candle than it was before. When the second candle (the down day) lasts for a longer period of time, the risk of a more serious sell-off increase.
7. Fundamental exits
It is likely in your best interest to close out of your position whenever a significant piece of news hits the financial markets that cause a shock to the economy.
There are a lot of essential news occurrences that might be quite important. But none are more significant than the outcome of the presidential election in the United States, particularly when none is anticipating it. On November 8, 2016, Donald Trump was declared the winner of the election for president.
Following the release of this significant fundamental information, the Dow Jones Index saw a gain of 9,100 points in a little more than a year. In retrospect, it would have been quite astute of you to get out of the position you were in as soon as the news came out if you were pessimistic about the market.
When you are trading the markets, some other important fundamental news events that you should consider are as follows:
- NFP findings & full unemployment data
- Rate choices made by the central bank
- GDP figures
- Inflation data (CPI)
- FOMC & ECB meetings
What is the most effective method for reinvesting profits?
There is no one method for maximizing profits that can be singled out as being superior to the others. Your trading plan and approach will ultimately determine the outcome. We have included a list of some of the most common ways to take profits, and we recommend doing tests to see which ones work best for you.
A final word
Now it is your turn. Which of these exits do you believe is worthwhile to try as part of your trading systems? If you haven’t already, establish a demo trading account and begin testing various exit strategies to see which ones perform best.
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