Good afternoon from a very wet London,
I hope you had a lovely Christmas and took some time away from your charts to relax and enjoy some family time.
No doubt, like me, we are all feeling a little lighter on the money front having come through a very expensive period of the year. So nothing better than to re-focus our attention to the skill of trading and specifically profit taking. Also, ever since I posted the blog http://springboardyourself.com/2013/12/15/will-santa-rally-the-markets/ I have received a number of emails asking about when and where to take profits. So I hope the below helps.
[subscribelocker] Knowing when to take our hard earned profits is quite the challenge (and does rely heavily on your trading strategy) and it would take me a great deal longer than a few paragraphs on my blog to explain the full utopia of options out there. Instead, I will provide some suggestions which I have personally used to good effect over the past 7 years of trading and use the FTSE100 trade as illustration for this.
But first, why is taking profits so difficult? You would think this would be a highly rewarding and enjoyable experience but sadly it’s not. When a trade is running nicely into profit like the stock indices have, the confusion that comes across many newbie and even seasoned traders is as follows:
1. If I DO take profits now, what if it keeps going?
2. If I DON’T take profits now, what if I give everything back?
These thoughts are natural and come down to our basic FEAR OF MISSING OUT. As humans, we never like to miss out on anything, especially not profits! So, based on understanding this human psychology (and you know how much emphasis I place on psychology)…let’s go through a step by step analysis of the FTSE100 BUY position we looked at a couple of weeks ago:
STEP 1 – Using your charts and technical analysis, ask yourself, where is price likely to go?
With the FTSE100 you can see there is a large channel which price has been in-between since 2011 and has reacted sharply to the bottom support level (which was our entry zone). Therefore price, realistically has the potential to achieve around 800-900 points before it reaches to the top of it’s channel. Fantastic reward potential and well worth taking the trade. Knowing this profit potential then encourages you to stick with the position through it’s journey.
Step 2 – See what technical road blocks could effect your trade on the way?
Do you see anything on your chart which could effect your trade on it’s way to your major target? In the example of the FTSE100, price is in a short term wedge so could encounter near term resistance around 6800 (see chart below). This is reason enough to have a plan for taking profits along the way, just in case price does react here.
Step 3 – Decide on when and how you will take profits (before you take the trade)
A long term target is great to focus your attention on the bigger picture of the trade but price may or may not reach this level. So look to take some profits along the way and be able to move your stop to breakeven (your entry price) as early but as carefully as possible. By taking some profits along the way, you get to overcome your desire to realise some capital gain (and to reduce the worry of giving profits back) whilst still keeping a position on to enjoy the rest of the ride.
In the chart below, you will see the technique I often use to obtain my short term and long term profits. These are as follows:
1. Open a trade with 2 positions (I split my maximum risk across these i.e. 2% max risk split over 2 x trades of 1% risk each)
ition 1 has a profit target of +1%. Position 2 has no profit target i.e. open ended.
3. Once profit 1 has been hit, I move my stop on position 2 to break even (risk free trade)
4. I leave trade 2 to run and trail my stop accordingly.
So, there are just a few tips and techniques for profit taking which I personally use and also teach to others. Why these specifically? Well I know all too well, from personal experience and from coaching other traders, that our minds play havoc with our trading rules. By having a take profit system that enables you to get both instant gratification (money in the bank from position 1) and also long term growth (position 2) it helps you reduce the fear of missing out that we spoke about earlier and can do wonders for your discipline.
Having the second, risk free position on the FTSE100 means that now I can let the market do it’s thing without having to worry too much. If we do hit the long term target of circa 900 points it would mean a return +7% to go alongside the initial 1% already banked. Even if the trade falls short and the trade only achieves half this amount it is still a return on your investment that you are certainly not going to find elsewhere, and a major reason I continue to love and promote trading the financial markets.
I hope this helps and sets you up nicely for a very profitable 2014.
A happy and prosperous New Year to you all.
Good afternoon from a very wet London,