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Taking profits too early?

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Afternoon,

I am new to the forum and looking for some advice on profit taking. What are other traders looking for to say, 'that's where I am taking my profit!'

 

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Hi @Mitchell2012, that's a pretty big question and if you were looking for answers that you could use for your own trading it would help if you narrowed it down a bit. For example the type of asset/market, the chart time frame, the trade duration estimation, the risk/reward you were seeking. An intra-day trader is going to give a very different answer to that of someone more interested in investments.

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Afternoon @Caseynotes, thanks for your reply.

So I am spread betting the UK stock market generally look at markets within the FTSE 100 and 250. I use the daily time frame candlestick charts.

I tend to use trend lines, support and resistance to analyse my charting. If I think I can see an entry on the daily chart I will usually then go down to a smaller time frame to get a better idea of what I think is happening and look for entry if I feel I need to.

When you search the web the taking profit side of things is as big as the analysis and entry, I guess that's what separates you from the successful traders and those struggling to find success.

I wanted to get an idea maybe of what other traders are doing.

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@Mitchell2012, that narrows it down, maybe @TrendFollower & @rimmy2000 can help out. When to get out is just as important as when to get in as your web search indicates, do you look to a target or rather rely on a stop to get you out? The trend followers tend to prefer staying in for as long as possible and using some kind of trailing stop which means losing a bit of profit at the end but capturing as much of the move as possible.

This is an interesting short video on using stops. (don't worry about the 'sorry' sign, just click the blue 'watch on vimeo' tab).

 

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@CaseynotesI have previously looked at using targets, so looking for the price to move into zones, price has broken through resistance, looking at the price history so what happened when the price previously broke this zone and looking for the high to be my target. Unfortunately psychology gets the better of me and I take a profit too early, then on paper I have been right in my thoughts. My next trade I may take a loss, unfortunately that loss is equal to previous gain meaning at 0 profit.....doh!

I don't currently network with other traders, which if there is one thing I have heard over and over again, if you want to be a successful trader you need to network with other traders...so here I am.

I am not looking to be perfect, buy at the bottom and sell at the top, but what I do need to do better is make sure I am taking full advantage of the direction the market is moving in.

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Hi @Mitchell2012
A lot of good practice suggests you should have this figure (target or profit taking point) in mind before initiating a trade. This is because theory suggests a trade should be driven by risk:reward, and you only know this if a) you know when to get out and b) the realistic target you are aiming for.

And the target will depend on how you are applying a valuation to the trade. For example, in this article https://community.ig.com/forums/topic/4690-renold-rno-50-upside/?tab=comments#comment-4690 I looked at what I felt are the intrinsic value of the share, entered on a technical trigger and closed profits at about 40% gain. Of course the gain did not have to be taken, the stop could be moved-up in line with the gain and therefore run the profit.
On other threads I have tried to value the shares using a variety of methods: previous takeover target prices (WMH) perceived imbalance of valuation compared to peers (TWTR) 
If you trade the large and mid caps then a very simple method is to set your valuation based upon perhaps the PE of the index and applying that across to your choice of stock. Another method I commonly use is PE mean reversion: trying to find a value based on the historic trading value of the stock. I have done this with TED, finding a valuation based on previous multiple and combining this with latest broker forecasts.. and I note by the way the stock is up 7-8% today. I think the reversal is underway (an aside point)
So really it can be a horses for courses, and a multitude of factors, but the sane point is that you should have a basis for the trade and this would be based upon potential profit (eg target price) and perceived risk (how much you are willing to stake/lose on the trade.
See if you can apply these principles to your trades.

quick post as in france.
Regards 
 

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eg this on TED has allowed me to specify my target. Its pretty simple but allows me to evaluate the trade.

 

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@Mitchell2012 and @Caseynotes

@Caseynotes is right. It all depends on your trading style and minds perspective. Someone trading using a trend following strategy would allow their winners to run and not sell too early. Now one does not have a crystal ball so how does one know not to sell too early? Well identifying if the there is a trend reversal. Well if you had an asset making making a lower low followed by a lower high, or a lower high followed by another move lower.

@rimmy2000, is right in that one should know their exit price before they enter. However with trend following when in profit one would initiate a trailing stop loss. Even a normal stop loss that you manually amend should be sufficient if you are watching the price action. The stop loss will ensure should you identify a possible trend reversal and then you exit.

 

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This is a biggie! Such a loaded question and it’s good to see a number of replies from everyone. 

When it comes to me I tend to make my decisions well I’m advamce to try and rule out greed and emotion. I know pretty much 95% what my total win/loss will be no matter where the market goes. (The other 5% I play with cos let’s be honest - I need the emotion and mind release every so often). Also if the fundamental landscape changes then of course you need to re-evaluate your position. 

Im also not trying to get the top or the bottom of the market. My grandfather said once that you should “always leave a little for someone else”. Lovely phrase on my opinion and basically boils down to ‘don’t be greedy’, ‘don’t try and get out at the top’, and ‘don’t over leverage yourself’. 

When it comes to take profit levels I average out (and average in too of course). If I think the market will go to 100 say, I’ll be averaging out a small amount at 80/90/95/100/105/110. Most at the 90/95 level. You can do this on a spread bet say you’re long £5 a point you can call IG and they’ll split the trade. 

I also ALWAYS ALWAYS ALWAYS use a guaranteed stop and manually move it up to act as a trailing stop (by setting price alerts and manually moving). 

Also - if you’re asking “when should I take profit” then you should probably take a bit of profit ;)

when we’re looking at specifically when to buy and sell... that’s a lot harder to write out. Hopefully you’ll find the above interesting though, and helpful. 

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There is only so much we can do by using the various functions for taking profits in the trading platform. Ultimately, to improve on when and how in taking profits, we need to improve on self-control in our daily life and the self-control will manifest in our trading. If we don't have enough self-control to begin with, all the various functions for taking profits will be thrown out of the window when emotion kicks in. Try cultivating a daily habit which we must do everyday. E.g. Waking up at 5am every morning.? "Time is up to individual, main point is self-control."

"Master ourselves and we will have a chance of Mastering the markets."

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So lots of good advice @Mitchell2012, consider targets, stops, guaranteed stops, and self control.

Combine.

Targets are fine but levels were made to be broken, have a notional target level but watch what price does as it approaches it, if price hesitates think to bail, but sometimes you get a power bar that just blasts straight through. 

Have a trailing stop anyway just in case, that could be auto step-wise or manual that you move on a daily basis, use as a guide any of the following - MA, prior high/low, prior support/resistance, a percentage. If the stop is an order to open an equal amount in the opposite direction to cancel the position you could also have a deeper guaranteed stop in case of a Black Swan type event. 

Importantly, test any method you choose on demo to prove to yourself that it works over a number of trades, that will give you the confidence to exercise self control.

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I had this thought early down the gym... 

CONSISTENCY! 

...that’s what it’s all about. The whole point is to make some money right? And that only really happens by being consistent with your winnings and losses. It’s better to closefor a small profit rather than holdit too long and get burnt. 

Make a number of small wins... don’t regret it if the market continues to move up, but do learn from it. Why did it continue after you took profit? Could you have predicted that at the time? What are you going to amend for next time?

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@SkyAndy19790607, yes quite right.

@PandaFace, taking decisions well in advance does not eliminate greed and emotion. 

@Caseynotes, I agree that targets are there to be broken. Trend followers love to see new 52 week highs. This means previous high (price target) has been broken. Why would a trend follower want to sell at this point? 

@PandaFace, trend followers will not agree with your thoughts of better to close for a small profit than hold long and get burnt. Trend followers want to let their winners run and will try not to take profits until that trend changes / reverses. Simply put it is about letting your winners run and not selling too early. I appreciate your views but as someone earlier on and I think it was @Caseynotes suggested that the answer to such a question really does depend on what your trading strategy is, what assets you are trading, what your goals / plans are and how you intend to meet those goals. This is anything but a simple answer. 

The key to answering this question is what is your trading style?

Is it trend following or does it fit into any of the below?

  • Momentum trading
  • Swing Trading
  • Intraday trading
  • Trading on news
  • Scalping

The timeframe will be extremely important in deciding your exits. 

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