Marilyn Monroe once said “Never regret anything because at one time it was exactly what you wanted”. Profit taking with regret is a potential problem for traders who don’t know what they want. The issues of the optimal time and the correct time to take a profit are best addressed within a trading plan.
Choosing a profit taking method is a good addition to any trading plan. Some of these include:
· Setting a profit target
· Optimising your timeframe
· Protecting open profit
Traders often focus on entry but it is your exit strategy that will deliver a potential profit.
Let's take a closer look at setting a profit target.
Before a trade is opened, setting a profit target removes the decision of when to take your profit. Setting a profit target means setting a planned exit price. A planned exit enables you to lock in a profit. Some simple examples of how to set a profit target include the use of a support/resistance target, percentage target and an ATR based target.
Figure 1
These profit target methods can be used on any timeframe and in any market. Identifying support/resistance targets involves looking for areas where price bounces off or shows resistance to particular price levels. On the chart, Figure 1, I have identified 3 of these levels. A profit target may be set at either of the levels, 1, 2 or 3. Using a percentage target is a simple method to set a profit target. For example, you may want to aim for a 20% increase over the entry price. The ATR based target takes into account the risk to reward ratio. An ATR line is employed as a stop loss to work out the initial risk from the entry price then is projected by the same amount above the entry price to work out the profit target. A clear target makes decision making easier as the position in the stock is closed as soon as price reaches the profit target.
The following is a past trade I made on Archtis (AR9).
Figure 2
After analysing and deciding that this was a potential trade, the first thing I did was place an Average True Range (ATR) stop loss line underneath price. Using an indicator such as the ATR sets your stop loss and helps you set your profit target. For a trade entry to make sense you need to match the risk with reward of at least 1 to 1. Risk 1 unit to gain 1 unit. The ATR stop loss was 0.17. This is a risk of 11c per share below the entry price of 0.28. Based on risking 11c, my reward, ie my profit target, is set at 11c above the entry price. Adding 11c to the entry price on the day sets my profit target at 0.39c. Let’s see the trade in more detail.
Figure 3
A position in AR9 was opened at an entry price of $0.28. Over the course of the week, Figure 3, the price of AR9 continued to surge higher every day with one session gaining 27% in one day. The profit target price of $0.39 was achieved and the position closed for a profit. A couple of days later, price reached an intraday high of $0.60. Yes we could have made more profit but who can predict the future? Sometimes letting a profit run can result in a decline in profit or even a potential loss. Taking profit at a set target provides us with the security of knowing we have locked in a profit. Since exiting the trade, AR9 has been going sideways for the last couple of months. Locking in a profit has meant an opportunity to take our capital to trade another stock.
Before opening your next trade you might want to decide on your profit taking method to lock in or maximise a profit, with no regret, for it to become exactly what you wanted.