Taking Profits — Knowing When & Why

August 6, 2008 at 4:20 pm 1 comment

By FX Insights

Taking Profits — Knowing When & Why

The concept of knowing when and why to take profits on a particular trade is an area I’d say most traders struggle with… how far do you let a good trade run? When do you place a take-profit order/stop, etc.? 

Here’s an excerpt from an email I was recently sent. I will use this question as my basis for covering this issue of when to take profits…

Mod,

One question that comes to mind is in the area of taking profit. You 
have written a lot about your +1 stops but what I would like to further 
understand is when you take profit.

I may be completely wrong, but it comes across in the chat that you seem 
to give away a fair bit of profit allowing a fantastic entry that goes 
the way you expected get stopped out for +1, when you may have closed it 
for 50+ pips.

First of all, there’s no cut-and-dry, set-in-stone answer to this question. But in this post I will tell you how I do it and why I do it. It’s up to you to decide for yourself how you handle the issue of when to take profits… 

For me, each and every trade has its own unique gameplan. No two trades are exactly alike and are taken for the exact same reason. When I take a trade, that trade is only taken after it meets a specific set of criteria. I try to avoid taking knee-jerk trades or making reactionary trades. 

There are three types of trades that I take: scalp, intraday, and swing trades. Real-time market conditions will typically dictate what type of trade I take at any given moment. 

In general, here’s what I look for with each trade type:

Scalp: this is a trade that is typically closed within 8 hours or less, looking for 10+ pips. 

Intraday: this is a trade that is typically closed within 48 hours of being opened, looking for 40+ pips.

Swing: this is a trade that is typically opened for more than 48 hours, looking for 100+ pips. 

Now, I’m going to break down each trade type and explain when I would typically take profit, when I would use the +1 technique, and when I would let a intraday or scalp trade evolve into a swing trade… 

Scalp:

Scalping is something I do the least of at this point as I’ve seen that bigger money and better ROI can be made trading on an intraday and swing basis. There are times, however, that the euro will fall into a no-brainer predictable range and it’s easy to pick the market’s pockets for 10, 15, or 20+ pips per trade. 

I do not scalp on Sundays or Fridays. I do not scalp 4 hours prior to big fundamental data releases or central bank events, or central banker speeches. I do not scalp 2 hours prior to Frankfurt opening and I do not scalp when London and NY are getting ready to open or within the first 2 hours of Frankfurt, London, or NY being opened. 

My preferred time to scalp is after 7:00 p.m. EST and typically no later than Midnight EST. I like to take profits on my scalp trades before Midnight EST. I also prefer to scalp after the EUR/USD has made an extended 220+ pip move.

No matter what I my near-term and short-term bias for the EUR/USD is, I will trade both directions when we’re in a predictable range. I can use my 30-minute price openings and watching the real-time price action to determine the support/resistance within a range and to scalp it accordingly. 

The more you watch the price action of the EUR/USD, the more familiar you’ll get with the EUR/USD’s personality and you’ll know when it’s “safe” to scalp a range without fear of getting caught in a breakout that goes counter to your scalp trade. Finally, I almost never use the +1 technique on a scalp trade. 

Intraday: 

I typically look to take an intraday trade after London has been opened for at least an hour. I like to see what the market does during the initial two 30-minute timeframes of London. My preferred time to add intraday trades are after 9:30 a.m. EST. 

If I see an intraday opportunity during Frankfurt or early London I will take that opportunity, but it’s rarer that I trade those timeframes as I do not like the chaos that can go on when those markets open. I prefer to just watch, let the dust clear, and then get a better sense for what the market is going to do between then and 5:00 p.m. EST. 

If my intraday trade is counter to my near-term and or short-term bias, I will typically put a +1 on the trade once it’s in profit 10+ pips as I’d rather just make 1 pip instead of letting the trade go into drawdown and I may look to re-enter at a better entry. 

If I have an intraday trade open and we’re getting close to a session or timeframe that could add a new level of liquidity and volatility, I may close that trade out and secure my profits. I will typically take an intraday trade, for example, after we’ve done something like open lower for 7+ 30-minute timeframes… in this case I would probably take a euro long, looking for at least 50 pips. 

If we have a situation where we’ve moved 220+ pips between Frankfurt/London and the end of NY session, I will typically take an intraday trade, going opposite of that extended move and profiting from the potential retracement that is typical. 

Also, depending upon my available margin, I may take two or more intraday trades that are stacked 10 or more pips apart. For example, let’s suppose I took three intraday trades, EUR/USD longs – the first long at 1.5405, the second long at 1.5390, and the third long at 1.5375. As the euro would begin to move up, I would likely close the 1.5405 first, maybe for a pip, 5 pips, 10 pips or more (depending upon market conditions) and the other two would remain open as they are better entries. 

The euro continues to move up and maybe I close the second one from 1.5390 for a profit of 25 pips, leaving the third long as my bread and butter intraday. Let’s say I took 10 pips on the first long, 25 pips on the second long, giving me 35 total pips, and the third is still open. If I see in the real-time price action that I can get more than 50 pips on my bread and butter long, I will do so. Or, if I see we’re running out of steam to keep moving up, I’ll lock in my profits with 50 pips, giving me a total of 85 pips from all three trades. 

Sometimes intraday trades turn into swing trades… 

Swing:

Swing trading is a completely different concept as opposed to scalp and intraday. It’s more of a science and an art and requires a tremendous amount of patience and not letting your emotions and the “noise” of the market cloud your thinking. Swing trading, in my opinion, is really the only true way to make serious profits and ROI in the FX market. 

I will almost always have one or more swing trades open and I can have both long and short swing trades open simultaneously. As of the writing of this post I have a euro long swing open at 1.4595 and a euro swing short open at 1.6011. The market is not anywhere near either one of those positions at this point, both are in tremendous profit, and both will be closed, at some point, for no less than 100 pips. 

Under current market conditions and based on current EUR/USD price action patterns, I will typically begin to look for swing trades after the EUR/USD has corrected down 600-800 pips from a high top or has moved up 1200-1500 pips from a low bottom. Again, this is not set-in-stone, but more of a rough guideline, as always, real-time price action and real-time market fundamentals will always ultimately dictate when I take a trade… my trades will ebb and flow as the market ebbs and flows… 

With swing trades, suppose I have three or more swing trades open, the “worst” of the swing trades will typically be closed after its gained 100 or more pips of profit. Now, if I see a situation like we’ve had since the middle of February, I will keep those swings open for well above the 100 pip profit target… for example, I recently closed a 1.4631 at 1.5841. Reason being is because I started shorting everything above 1.5850, so I used that price zone as a place to close out a euro swing long that was higher than a few of my better euro swing longs. 

Hopefully this all makes sense and gives a better idea of when and why I would take profits on a particular trade. No matter what, I almost never give an exact target on a trade. I cannot and will not paint myself into a corner like that. If I take a scalp trade and the euro does a mini breakout, well, I’m going to capitalize on that and not lock myself into just taking 10 profits… 

If you have any questions or need something cleared up, please ask.

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1 Comment Add your own

  • 1. Emerson  |  October 29, 2008 at 6:01 pm

    Hello adriaani, how’re you doing?

    Do you know what happened with the FXI website? Their page is out since last week… I think many guys are missing their analysis like I am. 😦

    I hope I can hear anything about it from you.

    Thanks
    Emerson

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