You’ve entered a trade and find yourself holding onto a winning position – do you exit now or do you hold on just a little bit longer?
This is a dilemma that every trader faces. We’ve all been there – the struggle of not knowing when to exit a position. Exit too early and you feel like you’ve sold yourself short, but wait too long and you may end up with zip.
If you don’t have a profit taking strategy in place, you’re leaving the decision making open to randomness and bias.
As you see profits multiply, it’s easy to lose sight to greed. We have this innate notion that “I’ll sell when I’ve made a big enough profit”. But the problem is – when are profits ever big enough? Remember, trends are often short-lived and price action can whipsaw both up and down. Without a plan, don’t be surprised if you’re left watching as your once profitable position turns red, or conversely, you leave too much money on the table.
The best way to avoid this, is to have a profit taking strategy in place long before the trade even begins.
Have a Plan.
Trading is a mental game. You can spend hours studying charts trying to predict the next big market move, but all this is pointless if you don’t work on your mental development and put in the time formulating your own trading plan.
Having a systematic, methodical way of taking profits is imperative to being a profitable trader.
Setting predetermined entry, exit and profit taking points helps remove most of the emotional aspect of trading. When a trade is planned out well, all that’s left is the execution according to your own parameters. A stop loss will manage the down side and setting profit taking levels will manage the upside. Don’t leave it to guesswork. Have a plan.
Risk to Reward Ratio [RRR].
Always enter a trade with what you’re willing to risk before thinking about the possible reward. Nobody found money on the ground staring at the sky.
When it comes to developing a successful and consistent trading plan, it all comes down to your risk to reward ratio. One of the most important trading metrics, the risk to reward ratio measures your potential reward for every dollar you risk. For example – If you have a risk reward ratio of 1:2, this means that you are risking $1 to make $2.
How to calculate your Risk to Reward Ratio?
RRR = (Entry – Stop loss) / (Take Profit – Entry )
The risk to reward ratio measures the distance between your entry and your stop loss and your profit order to your entry and compares the distances. So if the distance between your entry and stop loss is 100 points and the distance between the entry and profit order is 200 points, your RRR is 100/200 or 1:2.
If you’re using charting platforms like TradingView, you can easily calculate your risk to reward ratio on every trade by using the RRR tool. All you need to do is choose the risk reward tool and input your entry, stop loss and target profit.
How to incorporate your Risk to Reward Ratio into your Profit Taking Strategy?
Let your winners run, not your losses. Average up, not down.
Here at Echelon 1, we like to keep things simple and advise our members to keep their trades at 1:2 risk to reward ratio, at the very least. This will become our first target to take profit.
Once the trade has reached our first price target we book profits on half of our position, and set a stop loss for the other half of the position (Runners) at entry price.That way, even if the trade turns against us, We’ve locked in some profits and there is no longer any danger of losing money on that position. And if the trade continues to move higher, we’re still in the game.
Having a trade that can no longer pose a financial risk is the easiest way to remain psychologically and emotionally uncompromised while chasing higher profit percentages.
Becoming a successful trader all comes down to smart trade management. Have a plan. Have a profit taking strategy and take money off the table to reduce your risk.
If you’re new to investing and want to learn how to navigate the markets with confidence, come join us at Echelon 1 and be part of a thriving network of traders, analysts, and investors. Learn the fundamentals, receive mentorship from seasoned professionals and have access to real-time analysis and member-only plays, so you can capitalize on the biggest moves in the market.
Welcome to the Echelon 1 community and take the guesswork out of your trading.