Once you are in a profitable trade, the next challenge becomes when to take profit. Optimizing profits is the other main aim of trading, besides limiting losses.
As a trader you must determine the risk/reward level that is comfortable for you, either on your own or by discussing it with your broker.
Below are some exit strategies, but these are not exclusive; there are many trade management techniques. Take your profits as you see fit, as it is your trade and you must manage it. No one else can do it for you.
Exiting a Profitable trade
Trailing Stop - Once a profitable position has been established, maintain a trailing stop e.g. below the current price if you are long. Again this can be set in actual dollar amounts, percentage terms, or using technical analysis principles.
However you approach the stop price, it is a level beyond which you are not prepared to give up profit, or where a position slips back to evens or a small loss. As the price continues to rise your stop 'trails' higher in tandem.
As an example, if you were to set a straight forward $300 trailing stop and the security moved in your favor by $1000, you could change your stop to be only $300 behind the price and lock in $700 of profit.
In this way you lock in profits and you are still in the game should the trade continue to go in your favor. You could also trail the stop until e.g. you get another signal as in a trend line breaking.
Take partial profits - Another strategy commonly used is to close, say half your position when you are comfortable with the profit level, and let the other half continue to trade. In that event also use a protective stop, either static or trailing, to prevent profit erosion on the balance of the position.
End of Day - If not stopped out by a stop loss, or a trailing stop, exit day positions before the market closes.
Holding Positions Overnight - If you are setting out expressly to trade longer-term positions, always check where the market is and if you need to close or adjust your stop.
Buy Points - Once you have decided a price at which you wish to buy, adhere to that strategy. This is particularly true if you are waiting for a certain price to trade to confirm your view. Jumping the gun can be risky; the entry level may never be reached.
Chasing a market up or down can also offer the potential for greater risk and less return (see below). Also, when a security nears its entry level watch very carefully how it trades. Is price moving faster? How is it trading? Do we see a lot of buyers or sellers at the entry level?
All of this will help to determine if a trade is likely to be a profitable one. No one knows the future, but paying attention to how a security is trading will certainly help you make more profitable decision.
Author Resource:-
Martin Chandra is a full-time investor. He has been researching investment strategies and make his own living. For more information please go to here.
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