Odd as it may sound; traders often find it a challenge to take profit! This is an issue that every market speculator has to deal with at some point.
Just as we have a series of rules to enter the market, we must equally have a strategy to exit. The trouble with this is that greed and fear usually rear their ugly heads when a trade is in profit, so there’s also a strong psychological element to contend with.
In very simple terms, a take-profit order is an instruction to liquidate a position upon reaching a designated level. When the order is activated manually (using a market order), it’s usually closed at the current market price. However, take-profit orders can also be used in the form of a limit order, which, as you probably already know, are typically filled at your elected price level, or better.
Still, it’s important to note that in a fast-moving market where price can change in a matter of seconds, price can alter substantially between the time the order is placed and the time that it’s completed/filled. This, fellow traders, is called slippage.
Clearly, each trader is different in terms of how he/she is comfortable interacting with the market, so there’s no right or wrong answer here. From our perspective though, a take-profit order is an essential tool – one that we would not trade without.
Setting take-profit orders enables us to leave the screens, and more importantly, helps remove the emotional impact from a trade. Be that as it may, there are times, especially when trading an intraday move, where we exit manually, but most of the time we let the market take us out using a limit order.
To decide on whether using a take-profit order is right for you, answering the following questions might help push you in the right direction:
If you’re in a position to monitor your trades but struggle to take profit when required, utilizing a take-profit limit order could be an option. On the flip side, should you be psychologically equipped and are able to monitor your trades, exiting trades manually may be a consideration. Ultimately though, it depends on the individual.
In our experience, taking profit (trade management) is generally far more difficult than pinning down an entry. Poor target location and lack of experience – coupled with greed and fear are all issues that cause traders not to take profits when they should.
Say you’re in a position which is currently trading at two times your risk. Unless you’re a disciplined trader with a take-profit strategy in hand, you will likely be feeling quite unsettled at this point as greed and fear will be battling for control. If you find yourself in this spot regularly, creating an exit strategy BEFORE you enter is key to help overcoming this. Failure to do so will result in emotional decisions taking the lead position of your trading, and this seldom ends well for most traders!
While it is impossible to list all take-profit methodologies here, we can help you identify three common approaches:
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