There’s no doubt that money is a key motivating factor for many traders. Whether it is to create an additional income stream or to make it the primary source of income, many people get into trading for the money.
However, the way we make money from trading may vary from one person to the other. This is because we have different views and ways of dealing with money – particularly profit from trading – which could affect the overall success of one’s trading.
“Many people think the object in trading is to get out close to the top. They forget that the real object is to make money.” – Jeff Cooper, successful short-term trader
In this post, we will look at some profit-taking strategies that have been used successfully by active traders. Depending on your style of trading, you may find some of these strategies may be more helpful than others.
Here are the top three profit-taking strategies used by successful traders
Strategy #1 – Ride winners well
It’s been said that there are only two certainties when it comes to trading. Number one is: You will have winning trades. Number two is: You will have losing trades.
And for the successful traders, it is about riding the winning trades well.
But what does it mean to ride the winning trades well? Aren’t we supposed to collect the money and lock in the profit once we have a winning trade?
Well, yes, but sometimes it’s not as straightforward as that.
For successful traders, once they have a winning trade, they make sure they add more money into the trade with the view of making a bigger profit.
For example, if you use technical analysis and you can see that your winning trade has a fair way to go before it hits a resistance level, you can add more money to the position and potentially make more money before it meets the resistance point.
Professional traders will be adamant in suggesting that riding winning trades is the key to their success.
Pyramiding into a winning trade
One way to ride a winning trade is through pyramiding. Pyramiding means adding to a winning position with the view to maximise the potential opportunity on offer.
The idea behind this is the trend has already been established and your initial position may be at breakeven or in profit. Now you are adding to the winning position with the goal of maximising the move.
Here’s an example of how to pyramid into a winning position:
- Capital allocated to the initial position: $10,000
- Risk on the trade: $200
- Once the initial position moves to breakeven, add a second position
- Your first pyramid entry might replicate your initial position size: Add another $10,000
- Trade goes further into profit and nearing resistance
- Your second pyramid entry is for 50% of your original position: $5,000
- Trade hits resistance: you take the profit and close the position
In this case, if you pyramided twice into a winning position, you would be making a bigger profit compared to when you have gotten out of the trade as soon as it hit a profit level.
Some good tips to remember when pyramiding are:
- It is best if your initial position’s stop loss is at breakeven or better
- Ideally, the system you are trading has the potential to capture solid trending moves
- Pyramiding when your average risk:reward is 1:1 is not worth it.
Strategy #2 – Big profits, small losses
We’ve all heard it and read it a million times, ‘let your winners run and cut your losses quickly’.
But for many traders, this is easier said than done.
Why is this?
When a big profit is staring you in the face, the most natural reaction is to lock it in. And this is exactly the opposite of this strategy.
Successful traders make it a point to hold on and be patient with big profits. When a trading position is going your way, and profits are on the rise, this is the time to hold your nerve and make as much from the trade as possible.
Having said that, if a trade is going against you, it is wisest to cut it short and fast. Another market saying goes: “The first cut is the cheapest.” This is because if you cut a losing position quickly, you cut the chance of it turning into a bigger, costlier and more painful loss.
Trend following strategies fit this model perfectly but do keep in mind you will likely have fewer trades.
Strategy #3 – Take your money and start anew
This strategy may suit the more active traders and short-term trader including day traders. The idea behind this is to take a reasonable amount of profit from a winning trade over a certain period.
For example, a day trader who trades currency pairs may look for 30-50 pips of profit per day. Likewise, a trader focused on index CFDs may look for 10-20 points per day.
This makes sense particularly to those traders who don’t want to take the risk of overnight movements that may cause wild fluctuations in the Forex majors.
Taking profit on a given trading session and closing positions to start afresh for the next one is a common strategy among active day traders.
Two ways you can use this strategy are by using a percentage or dollar profit target. This means you can use a pre-set percentage of profit for a given trade. And when that percentage is hit, you close the trade.
If you are using a dollar profit target, say you want to make a profit of $500 on a trade, once you hit that number, you close the trade and wait for another opportunity in the next trading session.
Traders who use technical analysis go by technical profit levels. This could mean using support and resistance levels, Fibonacci levels and other indicators highlighting potential turning points.
Using technical levels, which are easily applied to your MT4 charts, will give you clear and objective indications on whether to close or continue with a trade.