This article on Profit Taking Strategies is the opinion of Optimus Futures.

A big part of finding success in trading deals with laying out all the possible contingencies for a particular trade that can be broadly categorized into a winning situation, a losing situation and a breakeven situation. A strategy to deal with each of those scenarios, especially the losing and winning scenarios, is vital to a trader’s long-term success.

In a previous article, we discussed the strategies and options available to traders to deal with a negative position – that is, debating the methods for stop loss placement. In this article, we shed light on setting your take profit levels; an aspect many traders do not account for.

Stop-loss Disclaimer: The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.

You Need a Sound Profit Strategy

Newer traders will usually focus more on trying to nail their market entries to allow the trade to post a gain as early as possible. While that is totally acceptable – experienced traders like to evaluate their winning trades more carefully and are prouder of trades that they were able to extract the most out of, against the trades that made a profit but well below the market potential.

Knowing exactly where the most logical point to vacate the market with a profit is a crucial skill to master for every trader. Just as losing trades can instill fear and concern among traders which adversely affects their trading results, profit too can instill emotions like greed for higher profit, or fear of losing the accumulated profit. Such emotions too can also severely hamper your trading results.

Therefore, it is important to have a strategy for profitable exits. Now let’s weigh the different strategies to cherry pick the ultimate winner.

Hard and Fixed Take Profit Level

The most obvious choice available to you is to place a physical take profit level “X” number of ticks away from your entry. It is ‘hard’ because it’s visibly placed on the chart and ‘fixed’ because it is the only final target for the trade.

This strategy takes every possible subjective aspect out of the equation making the take profit strategy as simple as can possibly be. This strategy works best with trading systems that rely on fixed risk: reward ratios or systems that rely on other entirely objective profit targets (like pivot points and Fibonacci extensions). This strategy is also the easiest to program into automated trading because of the objective clear-cut rules to determine the take profit level.

Due to the high level of objectivity, theoretically, this method should be best suited to newer traders who may be finding it troublesome to tackle changing emotions with changing prices. However, while absolute objectivity in trading sounds good in theory, it is often not the best course of action.

The primary drawback with this strategy is that it generally negates the very own subjective nature of markets themselves. When no two trades can ever be the same in terms of their probabilistic outcomes, a set-in-stone take profit strategy can quickly limit your long-term potential.

As an example, consider a very basic version of a hard and fixed take profit strategy: Taking full profit on the trade at the next obvious support and resistance area. In a sideways market price could possibly reverse or chop around before hitting your demarcated support and resistance zone. In a trending market, on the other hand, taking full profit at the first trouble area could limit the gain you extract from a seemingly promising trade that actually runs for a lot more. How do you tackle a case where the first trouble area is too close, or too far?

So even with a seemingly objective take profit strategy, it is not always entirely objective, and there are always grey areas in your day to day decision making that can seriously limit the potential of using such a strategy.

Let’s take a look at the opposite end of the spectrum.

Soft and Variable Take Profit Level

Like the strategy discussed above, this one too has a limited scope in terms of its application. A soft take profit level is one that is existent only in the mind of the trader but not actually executed on the platform itself.

The strategy is usually popular with day traders who are often dealing with fewer tick movements and would prefer to manually ‘kill’ the trade rather than place a take profit level that could accidentally be hit during a spike or a sharp price movement that is otherwise non-threatening to the scenario that the trader is perceiving. Some swing traders and longer time frame traders will also employ this strategy when they are relying solely on how the trade develops to manually close the trade.

Besides the usual inconvenience associated with having to ‘babysit’ the trade (there is no take profit order executed on the platform), this also leaves the trader extremely vulnerable to making decisions in the heat of the moment. This is usually a strategy best suited to professional traders who have already mastered the art of keeping their emotions from meddling in their decision making.

Consider a new day trader who chooses to use this strategy. What happens if he or she expects the market to move 15 ticks in their favor, but a sharp spike leads to a 30 tick gain that seems to be eroding fast as the volatility during the sharp price movement starts to subside? You would think that having to safely exit via a hard take profit level at 15 ticks would have been a better bet than having to deal with the anxiety of the volatile period of trading activity.

Hard and Variable Take Profit Level

A more middle ground between the above two strategies mentioned is the hard and variable take profit strategy. You should be able to decode that this would rely on a platform-executed take profit level that you are open to the idea of changing if need be.

This strategy seems to fetch the best of both worlds. A hard take profit level on the platform allows the trader the time and the peace of mind to step away from the market action, and yet retain the flexibility to alter the take profit level as and when the situation demands.

Consider a trader who takes a pin bar trade in a sideways market and has spotted a nearby support and resistance level that he chooses to place his take profit level at. With the idea of flexibility in mind, he may choose to move the take profit level closer to price and book a minor profit if the market seems to be struggling to hit the hard take profit level and is threatening to reverse. Conversely, if he sees more authoritative price movement in the anticipated direction, he could move the take profit farther away from price, possibly closer to the next major trouble area, to adjust to favorable market conditions.

As you may have realized, some flexibility is absolutely vital in making trading decisions for entering or exiting a trade for the vast majority of trading styles and methods. Within the paradigm of flexible take profit strategy, there exists an entirely new dimension called partial profit taking

Taking Partial Profits

Another way to add flexibility to your trading to allow for adjusting to varying market conditions is to take partial profits on trades.

Instead of having to necessarily exit the trade in whole at a particular price level, you may only take a partial profit. Doing this allows for reduced drawdown and risk associated with that particular trade while still allowing you to benefit from additional price movements in your favor, or on the flip side take a lesser hit if the market reverses on you.

The drawback to this method unsurprisingly has got to do with the subjectivity factor again. The thought of not having to entirely square the trade can easily push a less experienced trader to take some off the table possibly too early in the trade, and then having to reap a lower value from the bulk of the move. It may also lead to the trader risking more upfront on the trade knowing a quick partial profit would set off the additional risk taken, obviously discounting the possibility of the trade staying in a drawdown.

However, when done strategically to reduce drawdowns this strategy can also be mighty effective.  One way to do this effectively could be to book a partial profit at a price level that you would expect to hold as support or resistance for the price. In the case of a bounce off that level, the partial profit taken will help reduce the drawdown and potentially protect you from the possibility of a full loss.

Regardless of which strategy you choose for taking your profit off the table, much of the wisdom in the decision will result from your own understanding of market dynamics and your individual trading style. A well-informed trader who not only understands the markets but also his or her own trading style is forever in a better position to select his take profit strategy intelligently.

For the rest of us, this is a bit of an iteration process where we slowly build out our ideal take profit strategy as we collect our good and bad experiences from trading decisions.

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.