Forex Profit Taking

This lesson is a discussion of profit taking techniques.  If you are in a profitable forex trade this lesson will discuss options for profit taking and evaluating whether or not you should stay in the trade, exit completely, or scale out lots. Profit taking is part of the overall money management discussion.

 

Who Should Review This Lesson

This lesson should be reviewed by experienced forex traders who have an effective trading system and have successfully demo traded. They are now starting to have a complete grasp of the Forexearlywarning.com trading system.

You review the trends of the market and trading plans every day, set price alarms, and have been reviewing the resources provided by Now Forex and are now ready to start trading small amounts of real money. You are progressing, so your questions and needs for handling profitable trades are now changing. This lesson applies to trades you have already entered and are profitable in. Your level of experience is good and you are progressing.

You should be ready to start with real money trading with 2 to 4 micro lots. The profit taking techniques you use with this amount will be transferred to mini lots and regular lots at some point. So you practice with small amounts of live funds to get your strategies, experience and personal taste into the mix.

This lesson will present a lot of ideas, pick the ideas you like best and incorporate them into your profit taking strategies. If you are a veteran trading larger amounts of money the same principles apply so this lesson is of high value.

Managing profit is possibly of somewhat equal importance as the entry itself to some traders, once you have a profit you need to maximize it and follow some basic rules. You have a successful entry and are now in profit management mode. The overall goal is swing to position style forex trading and scaling out profitable lots as profits increase, this is the overall theme.

Basic Rule of Thumb for Profit Taking

If you have any currency pair that has moved strongly in your favor in the main trading session you can close out half of your lots, adjust your stop order on the remainder to break even and let the remainder ride on the larger trends, if they are strong. This a general rule of thumb for profit taking that can be applied to any trade. Although the basic rule of thumb is not too specific it mostly focuses on the time of day when most of the trading cycles are over and the market starts to consolidate.

If you choose to close out a portion of your lots after a strong move you can do so at the end of the USD session in a time window of 11:00 – 12:00 noon EST plus or minus 30 minutes. This is generally when the pairs end their moves and start to consolidate and move sideways. The “rule of thumb” is to scale out half of your lots and to move your stops to break even on the remainder then let the trend do the work from that point. This will satisfy the short term emotional need for profit taking that newer traders have while still allowing you to stay in the trend and have more upside profit potential, with no risk. This will teach a trader aspire how to be swing to position trader, always looking for a lot of pips.

When using the “rule of thumb” you move your stop to break even on the remaining lots after scaling out half of your profitable position, so if the trend continues for several days or even weeks on the larger time frames, you cash in and maximize your individual entries.

In a choppy and non-trending market this is not the case, however you will never learn to be a long term trader and hold positions longer until you actually do it. Nobody can make you do it or ask you to do it. Learning to be a longer term trend trader is something you must do yourself with small amounts of real money like micro lots.  What is  the reward of doing this?? Your first 200, 300 and 500 pip trade.

Pair Considerations When Taking Profit

If you have a solid entry signal from Now Forex Strategy, like a slingshot buy signal on a particular pair that has with no nearby resistance, and in this case you are trading the NZD/USD you may close out half of your lots at +50 pips and that’s probably fine. A similar signal on a pair like the GBP/CHF may generate a lot more pips and you may not need to scale out half of your position until +100 or possibly +150 pips. The volatility of the GBP/CHF is much higher than the NZD/USD so scaling out half of your position too soon might not be a good profit taking strategy.

You scale out half of your lots using the rule of thumb, but at two different profit levels for two different pairs because all pairs do not move the same way or have the same volatility. Then you hold the remaining lots with a break even stop. Later that day you can re-evaluate the market.  If you would like to get an idea of the volatility of the various pairs we trade check the volatility and characteristics of the currency pair you are trading.

Trends and Profit Taking Decisions

If you buy the EUR/JPY, for example, and all of JPY pairs are trending upward on the D1 time frame, then it is best to hold onto your EUR/JPY trade. Why would you exit?? It would take any forex trader less than 5 minutes to inspect the JPY pairs on our free forex trend indicators to make a decision to stay in the EUR/JPY buy trade or to at least assess the risk of staying in, if any risk exists at all. If there are any risks go back and use the rule of thumb and scale out some lots.

By doing this you are incorporating the trend into your thinking as to how to exit a profitable trade and using the D1 time frame for these decisions to hold. If you drop down to the H4 time frame you are looking to swing trade only for 2-4 days.

Support and Resistance And Profit Taking

Forexearlywarning.com has quite a bit of training materials on support and resistance. It only takes about 90 days to get really good at reading support and resistance if you look at the charts daily. When you enter a trade and there is no near term resistance or support your first expectation is for the trade to go to the next resistance level. If you buy the GBP/CHF at 1.5500 and the next resistance level on the H4 chart is 1.5600 you can scale out half of your lots there using the rule of thumb, then move your stop to brea keven on the remainder.

Later that day after the pairs are all consolidating or in the Asian session you can get a better read on the trends and drill down the charts on the GBP and CHF pairs to see if you think the GBP/CHF can continue higher. If the trends are strong you can hold onto the remainder of your position. Check the next major resistance on the D1 and H4 charts on the GBP and CHF pairs to estimate the next profit taking point. It takes 5 – 10 minutes. In a couple of days if you spot the next major resistance and the pair you bought is approaching this price or stalling near this price, it would be wise to scale out additional pieces of your position or possibly all of your position. A little bit of experience and a price chart sure helps.

Parallel and Inverse Pairs And Profit Taking

If you have a good and profitable trade entry using The Now Forex Strategy, you can scale out some lots using the rule of thumb as the trade becomes profitable. But sometimes it is just better to hold on to all of the lots. You can start by looking at the higher time frames on the currency pairs in the same currency group.

For example if you sell the AUD/CAD and the EUR/CAD and USD/CAD are also falling there is no reason to scale out lots. Also if the AUD/CAD does not have any major support nearby and the larger time frames are trending on all three pairs, once again there is no real reason to scale out any lots. It is much better just to hang on to a trade like this until it gets to some major support before scaling out lots. It does not really matter if that next major support is 100 pips away or 500 pips away, then you can take some profit.

In this case continue to check all three CAD pairs and they may keep dropping for days and days on continuing CAD strength. In this case you do not use the rule of thumb and there is no short term profit taking, HOLD all of the lots. Verifying the decision to hold was made by looking at other pairs in the CAD group and overall CAD strength, this is not an arbitrary decision at all. Use this same logic on any pair and individual currency group. If the market shows no consistency you can exit all lots completely.

Veteran Traders Taking Profit

There is no substitute for experience, and that’s true with a lot of things including trading the spot forex. Writing a lesson like this about taking profits on the spot forex can only get you so far. It is only a set of ideas on paper but you must now put these techniques into motion with demo trading and micro lots. This is the only way to “get the feel” for what you are doing with profit taking and eventually add your own personal tastes to forex profit taking.

As a general rule, when starting to trade the forex with micro lots newbies should scale out lots sooner using the rule of thumb. Veterans tend to let trades go much farther into profitability before scaling out some lots, that’s why they are veterans. They know what to do. A newbie may need to start to scale out lots at +40-50 pips whereas on the same trade a veteran may not even think about profit taking up to +125 pips on the same entry. New traders have a different psychological mindset an makeup.

Using Now Forex Strategy For Profit Taking

Now Forex Strategy is an entry management tool, but sometimes NOW FOREX will tell you to stay in a trade or possibly exit completely. For example if you buy the EUR/GBP and it moves up 150 pips over two days and you scale out half of your lots, then the following day the NOW FOREX  says to sell the EUR/GBP and it is headed for a break even stop just exit with some profit on the remaining lots. Complete reversals don’t happen that much on the forex, once every couple of months, so don’t worry about this happening too much.

Same example but scenario number 2. You buy the EUR/GBP and are running +150 pips profit. The next day the Now Forex indicates EUR strength or GBP weakness or both, now you have an indication that more profits are coming. In this case you do not need to exit, you need to check and see where the next resistance area is at for potential profit taking or scaling out lots. Not a lot of work involved here because you are already more profitable and you know you should stay in the trade a bit longer.

Profit Taking Using Deeper Stops

Sometime newer forex traders enter a trade successfully then they systematically raise their stops but keep getting stopped out. Then it happens again and again, using this technique you do not raise your stop at all in the life of the trade.

Example: If you enter a trade with 6 mini lots, and The Now Forex Strategy entry signals are good you can close out 3 mini lots at +40 pips then reset your stop to -40 pips on the remaining 3 mini lots. Sounds unusual at first but in this case you have zero risk of loss, but you are risking your current profit. This zero risk of loss is the trade off for running a stop 80 pips from the market.

If there are any short term volatility spikes and you should not be stopped out. You can subsequently move your stop to break even on the remaining 3 mini lots in a few hours or tomorrow as the pair moves farther into profitability. Traders always complain about getting stopped out, then subsequently the pair continues in the direction the trend. This is because they keep moving the stop up closer to the market, and the obvious answer is to run deeper stops but most traders do not readily see this.  This technique can be used by someone who must leave their computer after scaling out lots.

Profit Taking In A Choppy Market

You cannot learn to trade in a choppy market unless you can identify a choppy market. Identifying a choppy market requires skills in multiple time frame analysis, which is an important part of the Forexearlywarning.com system. It takes time and effort to get really good at.  To identify a choppy market you must drill down the charts on all 28 pairs by individual currency group every day but most traders are not willing to do this, so now we have a problem.

When you enter a spot forex trade is the market trending, oscillating smoothly or choppy?? Do you know this before you enter the trade?? Most traders do not. Just remember that by inspecting the charts thoroughly the day before you trade will tell you a lot, and after a good period of time of drilling down the charts your ability to identify a choppy market gets easier. Remember that you are in complete control. If the market is choppy it is easy to stay out of the market or reduce the number of lots traded over what you normally would trade.

As a general rule of thumb if you have a tight ranging or choppy market you should close out at least half of your lots at +40-50 pips, the exception may be the pairs with the GBP on the left or any of the other higher volatility pairs.  This compares to a trending market where you may be closing out half of your lots around +100 to +125 pips or +150 pips on the most volatile pairs.

Other rules for tight ranging or choppy markets are to be prepared to spend more time in front of the computer and use only the strongest signals on The Now Forex Strategy. Also if you wait for the main trading session and are patient waiting for major news items to hit you should be able to pull a smaller amount of pips out of the market until the market choppiness works itself out in a few days, it always does, and better quality trades are always ahead.

The key is to be able to identify a choppy market, back off on the number of lots or consider not trading, then scale out lots a little sooner when you do trade. If you have shorter pip totals as targets when you scale out lots on your trades in a choppy market you are doing all you can.

Price Alarms and Partial Limit Orders For Exits and Profit Taking

If you are in a profitable trade you should always know where the next major area of support and resistance is in case you want to take some profits at or near that point. You can set price alarms at or near significant areas of support or resistance to notify you that the profitable trade you are in might be ripe for some profit taking or scaling out of lots. Price alarms can also be set at certain arbitrary profit levels like +50 pips or +100 pips to alert a trader to close out some lots and move the stop order to break even. This will also improve your profit taking and stop positioning.

Partial limit orders are also useful. A partial limit order closes out a portion of your lots at a profit and pre-specified price. I recommend using these types of orders if your broker will allow them. For example, if you buy 6 mini lots of the CHF/JPY at 82.00, then you set a partial limit order to close out 3 mini lots at 82.50 (+50 pips of profit). Then you can set a price alarm at 82.50 as well. When the alarm hits it notifies you that your order to close out 3 mini lots has hit. This can be automated through some brokers or is built into their platform, it is called an execution alert. Then you can set your stop to break even on the other 3 mini lots. In this case you are using a partial limit order and a price alarm simultaneously at the same price, in this case 82.50.

Other Profit Taking Techniques

This section of rules for exit and profit taking focuses on scaling out profitable positions at multiple prices. For example if you buy 6 mini lots of the GBP/USD you can successively close out 1 mini lot at +20 pips, +40 pips and +60 pips. When the third mini lot is closed out for a profit then you can set your stop to break even on the remaining 3 mini lots and let them ride into more profit. There are trading platforms and automated systems that can perform this function.

If you are trading regular lots remember that 1 regular lot equals 100 micro lots. Some traders scale out micro lots at 8 to 10 different profit levels before setting the stop to breakeven on the remaining lots. This is unusual to do it this way but the traders I spoke to felt comfortable taking profit this way. So using micro lots can facilitate using multiple price points for profit taking even for full scale traders trading regular lots.

Profit Taking for Longer Term Trend Traders

If you are an experienced trend trader you know that your ultimate goal as a trend trader is to trade the larger time frames like D1 and W1. Then you can ride the major trends of the market, when those trends present themselves. Short term trading is fine too if the market is not trending but if you get into a trending market you may be in trades for a few weeks to a few months as you move past swing trading. Trading the largest time frames is predicated on the market allowing you to do this, if the market is not trending you must shift your profit taking to shorter term moves. You cannot control the market only your own analysis and behavior towards the current market condition and what is presented to you today.

The general concept behind this lesson in profit taking is to scale out some lots and ride the remaining lots with the trends, but in this case the largest trends could carry you into hundreds of pips of profit. Scaling out some lots and holding onto the remainder will facilitate learning how to do this and begin the next phase of your forex trading which is long term position trading. But even long term position traders need profit taking skills.

Being up 300, 500, and 800 pips on a long term trade is a completely different set of emotions because you can be up 500 pips one day and up 350 pips the next day but the long term trend is still intact. In order to experience these ups and downs you must trade using micro lots, then slowly build up your lots to full scale. It is a test of your will but at the same time you are profitable and this is what you aspired to be in the first place.

When you are up 500 pips on a trade and you move your stops up or down you  can get stopped out when trading the larger trends, but if you are up 500 pips and maintain a break even stop you can avoid stop outs with larger trends and volatile pairs. It sounds like bad money management to do this but after you move your stop up get stopped out a few times it sounds pretty smart.

Example: If you enter a trade with 6 mini lots and want to trade a larger trend you can scale out 3 mini lots at +100 pips and start to ride the trend, but leave your stop at breakeven. When you hit larger profit targets like +500 pips you can close out one more mini lot and keep two mini lots running with the same break even stop, or move your stops very conservatively and still keep them deep. Longer term traders can take profit and scale out lots into strong positive movement and momentum as the pip totals increase in the direction of the trend, but in this case you would leave your stops much deeper or at break even.

Leaving your stops at break even or moving them very conservatively means you are no longer subject to volatility, getting stopped out is not part of the equation in this case. The profit taking and scaling out of lots is dictated by when positive movement occurs in the direction of the trend. Most traders think the only way to capture profit is by moving stops, in this case your stops remain much deeper and you scale out lots into positive momentum and profits in the direction of the trend. Bigger trends, bigger stops, but all trades are profitable. Doing this and letting your trades ride for weeks and months will teach you more about yourself and your potential as a forex trader more than any article of any forex course, article or lesson on profit taking.You can tell yourself you want to be a trend trader or you can actually do it with micro lots and prove that you are.

Mobile Devices

In the past few years forex traders who are “mobile” are using tablets and smart phones for trading. If you are in a profitable position but away from home and want to scale out lots or take some profit using a mobile device, this is now becoming more common place. Checking prices and current profit levels can be done quickly on these devices. Subsequent exit decisions or scaling out lots can also be accomplished with these devices. Using these devices are a personal choice for a forex trader, but most definitely a consideration for checking profitable positions and assisting with profit taking.