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TAKING PROFITS 1.docx 8

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									                         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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