Taking Profit

[Carlos M. 230]

Hey Everyone,

Below is a great question one our YouTube follower's asked and is one that we get quite often, answering it on a post oppose to the comments in YouTube comments in case there is anyone that can benefit from it.

Based on YouTube Recap: https://www.youtube.com/watch?v=aufaWi5VS4g

 

Quote

I got into FSLR at the better point (didnt have MU on, wasnt in the room) but took profit too soon. Lesson learned. Or rather I keep having to force myself to take profits later and later gradually with each trade. So this is a great example for me, because I can see you and Andrew waited for around 50 cents on MU before starting the scale-out which gives me a guideline. FSLR I guess its ok to take profit sooner since its already gone down prior to your entry. Thoughts? Did you also have to go through this process of learning to take profits?

The answer is: Absolutely!

When I first started trading live, I used to take profits way too early... and this happens to a lot of us. I wanted to take profits off the table right away from Unrealized into the Realized and put money right into my account. And on the loser's I would do the opposite, let them run in hopes of it turn in my favor. Those trades turned into the biggest trading losses I have painfully experienced.  I had to learn how to take profits and is not as easy as it sounds and is not clear cut neither which is what makes it harder to plan for. There are a lot of things that I have to determine to set realistic and effective profit taking, like support levels, moving averages, entry position and most importantly price action. I used to get really hung up on hitting a support level when the price action is telling me otherwise and I end up breaking even or with a small profit. For me the price action has been the number one thing for taking profits.

If the price drops .30 to .50 I'm taking 25% off the table right away because on average that is a big move for the stocks we are trading. This secures some profit and I still have 75% left to play with. If it drops another leg 20 or 30 more cents than i'm taking another .25 off.  So this is aside from looking a levels once I have already taking some profits out this way, I ease back a bit and start looking for more signs and levels that support my price moving in my direction. These are not hard rules, there is no set tragedy, I am simply reading the price action at the moment and seeing what is giving me at that time. Also if my entry is not great, like FSLR on the above recap video, I know that the probability of getting another big leg down were not high so the minute it dropped I took profits and got out, the stock did eventually sold off and I could had made tons of money, but that's not they way i want to play the game. The probability of that happening over and over are not high so why take that gamble that is not in my favor. 

I hope this helps, I know is not clean cut like an ABCD Pattern, a lot of it is on feel and price action which can give off so many difference signals.

Andrew is the king at this I highly recommend try scaling out of a trade if you are having issues getting out too early. 

Thanks.

Carlos

 

 

[Dirk S 2]

Great post Carlos! I was coming to this realization just now too, good to hear it from someone who already understood and successfully uses this. Price action, statistical expectancy of how much a stock could move - the ATR has been a great addition to my toolset for this. The levels are important for planning the trade too. This should really help me from pushing the Take Profit button too early. I still need to practice it though Easier said than done. 

Thanks!

Dirk

Another great concept is the guerrilla trading idea that Andrew talks about - dont stick in the trade too long.

Edited June 26, 2018 by Dirk Schillmoeller

[Aiman 86]

I'm facing the problems of taking the profits too early and I'm on sim!! And I let my losers hit my stop loss and sometimes even 5 cents below it.. This ruins my winners and I believe it's a terrible way to manage the account. I'm on my way to improve that, let the runners run and cut the losers. Your post is really helpful! it's good to know that most of the newbie traders face the same problems, the better is having advises from those who went through those problems  Thanks a lot! 

[nassarsyed 82]

I have the same problem, I am going to set hard stops in Simm and let it play out and scale out based on technical scale while moving to Breakeven. Than leave 10% r run....

[Robert H 453]

This is a problem all traders face--beginner and advanced. Even Andrew and Brian mentioned this in the Lifetime Webinar. We go into a trade looking for 2:1 risk/reward, and end up coming out with 1:1 after scaling out. Our losers are almost always -1:1, if not greater. This means that with 50% accuracy, we break-even over the long-term despite claiming to take trades with a minimum of 2:1 risk/reward!

My journal tracks some key stats to see how well I'm taking profit compared to the risk I take. The required variables are:

• Number of shares
• Entry price
• Stop price
• Target price
• Max loss = (Stop - Entry) x Shares
• R-Target, aka Target Risk-Reward = (Entry - Target)/(Stop - Entry)
• R-Real, aka Realized Risk-Reward = P&L/Max loss

Let's use my $CAG trade from June 27 as an example of a good outcome.

I entered the trade looking for a 4:1 risk/reward (R-Target). Based on how I scaled out (in 6 steps), I managed to come out with an R-Real of 2.9. This is the type of patient profit taking you want to see over the long-term.

Entry	36.52
Shares	800
Stop	36.7
Target	35.75
R-Target	4.3
Max loss	144.00
P&L	412.78
R-Real	2.9

 

Now here is an example of a winning trade where the R-Real is less than half of the R-Target.

Despite being a winner, the realized risk/reward was actually less than 1. Statistically, taking trades like this over the long term would result in losing money.

Entry	42.87
Shares	100
Stop	44
Target	40
R-Target	2.5
Max loss	113.00
P&L	97.34
R-Real	0.9

 

I've been consciously trying to improve my long term average R-Real by taking profit more patiently. Similar to Carlos' advice above: (1) take first partial after a 0.30-0.40 (2) patiently take profit at original targets (3) keep the last 10-20% for as long as possible. This has helped bump up my R-Real, but it is nowhere near 2.0. As of right now, it is a mere 1.1 after 450+ live trades. My losing R-Real is -0.9. Both numbers are improving, but it takes a lot of practice. Improving accuracy of winning trades is another solution to this problem. If you can be right 65-70% of the time, then you can afford to have an R-Real of 1.0 and still be profitable.