Lesson 29 - Profit Taking Techniques For Forex Traders - Document Transcript 1. 29 – Profit Taking Techniques For Forex Traders This lesson is a limited discussion for profitable forex traders It is not a discussion of money management, this is strictly a discussion of profit taking techniques which is only a portion of the overall discussion of money management related to forex trading There is an old saying: “Nobody ever went broke taking profits”. Okay so lets learn some techniques to take some profits! Who Should Review This Lesson This lesson should be reviewed by experienced forex traders who have a profitable trading system and have successfully papertraded. They are now starting to have a complete grasp of the Forexearlywarning.com trading system. Things like support and resistance, trading with the trend and entering trades with The Forex Heatmap ™ are becoming clear and your papertrades are consistently profitable You review the trends of the market and trading plans every day, set price alarms, and have been reviewing the resources provided by Forexearlywarning 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. At this point it is presumed that you have at least 60-90 days trading experience using the Forexearlywarning.com system and The Forex Heatmap ™ for your entries. What Types of Traders Should Be Using This Lesson?? At this point you should be done with papertrading. You should be ready to start with real money trading with 2 to 4 microlots. The profit taking techniques you use with microlots will be transferred to 2. minilots and regular lots at some point. So you practice with microlots 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 lots 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 trading and scaling out profitable lots as profits increase, this is the overall theme. Basic Rule of Thumb for Profit Taking Profit Taking Technique Based on Time of Day 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 remaining lots to breakeven and let the remaining lots 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 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. This is a general philosophy or “rule of thumb” and the objective is to scale out half of your lots and to move your stops to break even on the remaining lots then let the trend do the work from that point. This satisfies the short term emotional need for profit taking but still allows you to stay in the trend. Know what type of trader you are, we are not scalpers and we don’t teach scalping at Forexearlywarning, we aspire to be swing to position traders and are looking for a lot of pips. 3. If you keep entering and exiting the same pair going in the same direction over the course of a few weeks you have ignored the trends and exiting your trades has cost you profit. You are not trading efficiently and letting the trends do the work. Emotions are involved. Over time you can break these habits and many traders have. When using the “rule of thumb” you move your stop to breakeven on the remaining lots, so if the trend continues for several days or even weeks on the larger timeframes, you cash in and maximize your individual entries. Obviously 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 you must do this yourself with small amounts of real money like microlots. What’s the reward of doing this?? Your first 200, 300 and 500 pip trade. Pair Considerations when Taking Profits If you have a solid entry signal from The Forex Heatmap ™, like a slingshot buy signal with no resistance, and 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 lots until +100 or possibly +150 pips. The volatility of the GBP/CHF is much higher than the NZD/USD so scaling out lots too soon might not be a good profit taking strategy. You scale out half of your lots using the rule of thumb and let the rest go with a breakeven stop. Then re-evaluate the market later on in the Asian session. Incorporating the Trend Into Profit Taking Decisions If you buy the EUR/JPY, for example, and all of JPY pairs are trending upward on the D1 timeframe, then its best to hold onto the trade. Why would you exit?? Forexearlywarning.com gives out a set of free trend indicators and it would take any forex trader less than 5 minutes to inspect the JPY pairs to make a decision to stay in a 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. 4. By doing this you are incorporating the trend into your thinking as to how to exit a profitable trade. Use the D1 timeframe for these decisions to hold. If you drop down to the H4 timeframe you are looking to swing trade only for 2- 3 days. Incorporation of Support and Resistance into Profit Taking Forexearlywarning.com has quite a bit of training materials on support and resistance on the Forex Heatmap Educational Blog. 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 breakeven on the remaining lots. 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 remaining lots. Check the next major resistance on the D1 and H4 charts to estimate the next profit taking point. It takes 5 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 lots or possibly all of your lots. A little bit of experience and a price chart sure helps. My free trend indicators tell you all that you need to know. Incorporation of Parallel and Inverse Pairs Into Profit Taking If you have a good trade entry using The Forex Heatmap ™ you can scale out some lots using the rule of thumb as the trade becomes profitable but sometimes its just better to hold on to all of the lots. You can start by looking at the higher timeframes on the currency pairs in the same pair group. 5. For example if you sell the AUD/CAD and the EUR/CAD and USD/CAD are also falling and the AUD/CAD does not have any major support nearby and the larger timeframes are trending on all 3 there is no real reason to scale out any lots. It is much better just to hang onto a trade like this until it gets to some major support before scaling out lots, it does not really matter if that 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 sometimes all three CAD pairs won’t have any nearby support 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, this is not an arbitrary decision at all. Use this same logic on any pair and individual currency group. Newbies Taking Profits Versus Veterans You know there is no substitute for experience, and that’s true with a lot of things including trading the spot forex. Writing a technical paper like this about taking profits on the spot forex can only get you so far. Its only a set of ideas on paper but you must now put these techniques into motion with microlots. This is the only way to “get the feel” for what you are doing and eventually add your own personal taste to forex profit taking. As a general rule when starting to trade the forex with microlots 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. Using The Forex Heatmap For Profit Taking 6. The Forex Heatmap™ is an entry management tool, but sometimes the heatmap 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 forex heatmap says to sell the EUR/GBP and it is headed for a breakeven stop just exit with some profit on the remaining lots. Complete reversals don’t happen that much on the forex 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 heatmap indicates EUR strength or GBP weakness or both, now you have an indication that more profits are coming and you do not need to exit and possibly 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. Advanced Techniques for Veterans- Deeper Stops Veterans forex traders should consider this advanced technique in a trending market and/or on more volatile pairs. Sometime you enter a trade successfully then you raise your stop to breakeven but keep getting stopped out. This is a potential solution for veteran traders. This technique involves running deeper stop losses but there is no risk of loss. Example: If you enter a trade with 6 minilots, and The Forex Heatmap signals are good you can close out 3 minilots at +40 pips then reset your stop to -40 pips on the remaining 3 minilots. In this case you have zero risk of loss, but are risking your current profit. This zero risk of loss is the tradeoff for running a stop 80 pips from the market. Any short term volatility spikes and you should be fine. You can subsequently move your stop to breakeven on the remaining 3 minilots in a few hours or tomorrow. 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 don’t readily see this 7. This is a guaranteed no-loss method of running deeper stops and a great way to avoid getting stopped out. This technique can be use for someone who must leave their computer after moving the stop up to breakeven and scaling out lots, but once again your profit is at risk. Profit Taking In A Choppy Market Forex traders in general have a tough time identifying a choppy market, or they just don’t know how. Also most forex traders concentrate on one or two pairs their whole trading careers and eventually fail. You cannot learn to trade in a choppy market unless you can identify a choppy market. Identifying a choppy market requires skills in multiple timeframe analysis, which takes time and effort to get really good at. To identify a choppy market you must drill down the charts on a lot of pairs 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, smooth oscillations or choppy, do you know this before you enter the trade?? Most traders don’t. Just remember that by inspecting the charts 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. But none of this risk management can be applied if you cannot identify a choppy market. Presuming that you know how to identify a choppy market and are willing to at least reduce the number of lots that you trade in a choppy market, here are some general rules for profit taking. As a general rule of thumb if you have a tight ranging 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 other higher volatility pairs. 8. 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 are to be prepared to spend more time in front of the computer and use only the strongest signals on The Forex Heatmap ™. 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 pips out of the market until the market choppiness works itself out. 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 and have shorter pip totals as targets when you scale out lots on your trades. 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 +100 pips to alert a trader to close out some lots and move the stop order to breakeven. This will also improve your profit taking and stop positioning. Partial limit order – 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. Example - You buy 6 miniots the CHF/JPY at 82.00, then you set a partial limit order to close out 3 minilots 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 minilots has hit. Then you can set your stop to breakeven on the other 3 minilots. In this case you are using a partial limit order and a price alarm simultaneously at the same price, in this case 82.50. 9. Multiple Scaleouts of Profitable Positions Automated Scaleouts of Profitable Positions Microlot Scaleouts of Profitable Positions This section of rules for exit and profit taking focuses on scaling out profitable positions at multiple prices. For example if you buy 6 minilots of the GBP/USD you can successively close out 1 minilot at +20 pips, +40 pips and +60 pips. When the third minilot is closed out for a profit then you can set your stop to breakeven on the remaining 3 minilots and let them ride into more profit. This is one example of scaling out at various profit levels. There are trading platforms and automated systems that can perform this function or else you can program in successive partial limit orders on some brokerage platforms. If you are trading regular lots remember that 1 regular lot equals 100 microlots. I have seen some traders who scale out microlots 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 microlots 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 timeframes like D1 and W1 and just 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 timeframes 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. 10. 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 hundered 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 use microlots, then slowly build up your lots to full scale. It’s a test of your will but at the same time you are profitable. 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 breakeven stop you can avoid stop outs with larger trends and volatile pairs. It sounds like bad money management to do this but after you get stopped out it sounds pretty smart. Example: If you enter a trade with 6 minilots and want to trade a larger trend you can scale out 3 minilots 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 minilot and keep two minilots running with the same breakeven 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 breakeven. Leaving your stops at breakeven 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 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 months will teach you more about yourself and your will and desire to hold on to trades much more than than 11. any article or lesson on profit taking or any forex course. You can tell yourself you want to be a trend trader or you can actually do it and prove that you are. Big difference. Special Situation Profit Taking Techniques For Red and Green Light Software Users If you use the red and green light software this section is for you. If any of the larger timeframes like 720 minutes and larger have increasing separation, which means that the green line is running away from the red line you would not close out any lots or take any profit on an intraday basis, this is a hold signal. INCREASING SEPARATION MIDTERM TIMEFRAME 12. INCREASING SEPARATION SHORT TERM TIMEFRAME If you have increasing separation on the 720 minute chart in either direction you would wait to scale out lots when the green lines on the short term timeframe (not 720 min) starts to converge or touch the red line. Close half of your profitable position then re-assess the market, support and resistance, parallel pairs, etc. Remember, wait for the short term timeframe green line to converge where the green line starts to touch the red line, then scale out some lots. Could be the next day or two days later. When the green line is running away from the red line with increasing separation on the 720 minute timeframe generally at least two more support or resistance levels should be broken or at least tested. If the short term timeframe or midterm timeframe on the red and green light software has increasing separation the pair should keep going for days, don’t scale out lots just yet. Summary and Conclusions Learning to take profits from all of your forex trades require that you have a profitable system to start with. At Forexearlywarning.com we have a profitable forex trading system. The basic concept and rule of thumb of scaling out some profitable lots is the starting point for profit taking. From that point and going forward from there you can continue to grow and mature as a trader by employing many of the techniques in this lesson into your profit taking and eventually become a long term trend trader.
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