Updated: Oct 24, 2019
When to take profit?, one of the most interesting question in trading is when to take the money..
How not to leave money on the table?.
You bought the stock at price of 201, sell it on 207, two days later the price jumped to 215, you feel so bad with yourself, why I'm so greedy??,why I'm taking profit like a chicken?, next time i will catch the edge!, I will not sell until the end of the rally!.
Let met tell you a secret, no one can catch edges, on the long run, you always gonna leave money on the table.
But the main question is not if you can catch edges, the question is if you need to try to catch the edges?.
Trading is not about being right 100% percent of the time, it's about getting a statistical edge.
You should enter the market only when the probability of moving in your direction is higher, not random (That's a very important topic for another post).
The most common way to get a statistical edge is by getting a strategy that have a wining probability of more than 50:50.
You can be a profitable trader by having a strategy that works 54% of the time,
you only need to be consistent and disciplined.
Some traders using "R" to describe risk milestones during a trade.
If you buy a stock at the price of 150$, Stop loss 145$, your R1 is 155$
Because in 155$ your out of risk, worse case you can brake even (minus fees).
R2 will be 160$ etc.
So if you have 46:54 winning strategy and you always taking R1 and above, your going to be profitable?.
On the other hand, Dr Edler wrote in his book "Come into my trading room" that a professional trader is a trader that "catching" most of the channel (Envelop, Bollinger, regular trend line channel)
OK, now you're probably confused...
What should i do, getting a winning strategy, catching R1 and run?? or should i wait until I'm seeing the end of the channel?.
Unfortunately, there is no binary answer to this question, it's not 1 or 0.
There is a lot of data that can influence the decision.
Here are some questions that you can ask yourself:
1 - Trading time frame - Intraday, Swing, position trader?
2 - Market condition - Up/Down trend, ranging, President Trump trade ware?.
3 - Trading strategy winning probability - How confident you are in your plan?
4 - What is your Risk management?
5 - Your nature - Are you willing to take risks?, How do you behave after a loss?
Taking profit is an art, You should combine all the above questions in order to fit the right taking profit for each one of your trades.
If your a swing trader, you should expect more than a 7% on each trade
But if USA and China are the middle of the trade ware, it will be very arrogant to be in a swing position an wait for more than a 7% reward.
The Post may look confusing to you but believe me, that's the truth.
We are not prophets, there is not way to know trade by trade where is the edge, You can guess several times and catch the edge, but remember that we are a marathon runners,
Winning a 100 Meters sprint won't help you.
You need think how to repeat the success multiple times and learn how to take profit consistently.
Human thinking is very strange, when we are in a trade and the price falls against us, We move the stop loss down and pray that the price will go up, when the price rising, we are afraid the price will start to fall and we are cutting profits.
It should be quite the opposite,don't you think?.
When the price falls, be afraid and cut the losses! and when the price goes up, pray for the price to continue to rise.
When you are planning a trade, Three things should be clear to you:
1 - Entry price
2 - Stop loss price
3 - Taking profit target
The taking profit target can be different between Channel/Triangle/Fibonacci retracement etc.
Having a taking profit target doesn't mean that you need to go all the way until you reach it, even if it will take 3 years.
It means that you have a clear plan and expectation and you need to do your best in order to reach that target, some of the time you won't get it and it's OK.
You can always use techniques like a trailing stop loss or sell part of the shares quantity during the way up.
Whatever you decide to do, keep in mind that we are in a game of probability and we are a long distance runners.
I hope I didn't confuse you too much :)
I'd love to learn about your taking profit methodology, please leave a comment or email me.
Wish you all the best,