TAKING PROFITS 1 TAKING PROFITS There are two ways to decid e when and where to take profits: (1) by the size of the profit and (2) by the trend/momentum line pattern and the price chart picture. Generally, I believe you should take most of your profits following the "size-of- profit" rule. (By "size" I mean according to the percentage of initial margin requirement.) Margin is simply good faith money deposited by you to cover any potential losses on your futures contracts. Margins are set by the various exchanges and are essentially determined by recent price volatility. The exchanges want to make sure your margin is sufficient to cover at least the current day or two standard deviation of price movement. The exchanges (and your broker) want to make sure you have enough margin deposited to cover any reasonable price moves over at least the next couple days (for the simple reason that they are responsible for any losses you do not cover). The bigger the recent price moves, the higher the margins will be, and vice versa. Margin requirements are a reasonably good reflection of the existing potential price movement for the next couple of days. In effect, margins automatically tell you what a "good" short-term move would be for any market at any time. Therefore, it is only logical to use margins to determine basic "size-of-profit" rules for taking profits. THE TWO GENERAL TAKING-PROFIT-BY- "PERCENT-OF-MARGIN" RULES ARE AS FOLLOWS 1 ~ When the profit on a trade reaches 50 percent of margin, begin to look for a good reason to take profits; 2 ~ When the profit on a trade reaches 100 percent of margin (or more), you need a legitimate reason NOT to take profits. The primary "reason" NOT to take profits when they reach or exceed 100 percent of margin is the market is in a solid concurrent mode. (By "solid" I mean neither trend nor ML have any chance of changing direction over at least the next few days or week, i.e., the concurrent mode is truly solid.) When this is the case, then it is perfectly acceptable—and frequently better—to give the trade some more time to work (i.e., allow the profit time to get bigger). Most, if not all, of the trades that produce more than 100 percent of margin profit will be those in solid concurrent modes. However, it has been my experience that even in cases where the profit on a trade manages to reach levels of 250 percent or more of margin (and this level of profit is somewhat rare), a good portion (a third or so) of the profit often will be lost in the few days before the lines finally switch back from Bullish or Bearish to Neutral. Trades that achieve really big profits tend, for some reason, to give back a good chunk of their profits in a very short time when the with-trend price move ends and turns back against the trend.What this means is that getting out "too soon" when in good trades tends to end up producing an equal,or frequently better, profit than waiting for the lines to finally switch back to indicating sidelines best (i.e., when a Bullish or Bearish Status switches back to Neutral). If your trading account is large enough to hold multiple contracts on a trade, then I suggest you consider the following approach: Take partial profits around the 50 percent margin level, additional partial profits at 100 percent of margin, additional profits at 150 percent, and then let the rest ride until you can make a good case the Status is on verge of switching back to Neutral. This approach is true pyramiding. Visualize a position starting with four contracts, then going to three, then two, and finally one and you have a pyramid. Of course, a trader would need to start with at least four contracts to do the above. Again, these position levels could be, and usually should be, overridden when/if the market is in a solid concurrent mode. This "percent-of-margin" method is an arbitrary, mathematical approach to taking profits; however, it is one I have found to work quite well. Naturally, this is just one general approach. Every trader has to adjust the taking of profits, like all other aspects of trading, to his or her personality and account size, as well as to the current technical patterns. The other way to determine when and if to take profits is to use the trend/momentum line patterns.
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