This Forex educational article will be dedicated to reviewing all the aspects regarding Take Profit, so I am sure that you are going to enjoy this Forex training guide.
For those of you who missed the earlier publications, please read the article on “stop losses” and “money management” by clicking on the article names.
First of all, do you have problems with taking profit? And if so, why?
Importance of profit
It goes without saying that the take profit strategy is just as important as a trader’s stop-loss placement. Both aspects are integral parts of the reward to risk (r:r) ratios. This ratio analyzes and determines the balance between the potential profit and the potential loss of the trade.
The r:r ratio is a vital and crucial factor whether a trader is profitable or not. The other item is that win versus loss percentage. The formula is:
(r:r multiplied by win %) – (1 x loss %) = expected result (number should be positive if profitable).
For example, with a 2.0 r:r, 30% win, 50% loss, and 20% break even score, the trader expects:
(2.0 (r:r) x 30%) – (1 x 50%) = +0.1 units of profit.
This formula establishes the true measurement of trading success.
The take profit (TP), logically speaking, has great influence and clear impact on the reward side of the r:r ratio.
Taking profit is a key element of trading success because it is the only moment when a trader actually realizes a profit. Any floating or paper profit from an open trade means nothing until the trade is closed and booked. Only then did we make realize reward and make a profit on that trade! If the win % and r:r are in good relationship with each other, then the trader can expect the benefits of profit.
Trading psychology and take profits (tp)
Similar to stop losses, many traders have difficulties with taking profits because of their trading psychology. Again the elements of Fear, Greed, and Impatience strongly influence the game of trading and severely affect trading decisions.
All these emotions have the nasty habit of letting the trader either book profit too soon before the target is reached or not book any or too little profit. And not booking the optimal profit, of course, creates a (too) low r:r, thereby harming longterm profitability.
These are the typical and usual consequences of the emotions which can occur during trading:
1) If traders are too fearful à the trade could be closed too soon;
2) If traders are too impatient à the trade could be closed too soon;
3) If traders are too fearful à the trade could be left open too long.
There are ways and methods how Forex traders improve trading psychology. The tricks and tools which can be used are:
1) Ironclad trading plan
Have a well-built trading plan with a great take profit scheme is important. It not only enhances and maximizes profits, but it also eases the trading psychology. Having take profits which make sense and are accurate is vital in maintaining confidence in the trade and having the ability to stay in the trade to the target. And staying into the target is what gives the big reward and maximizes the r:r.
2) Use take profit levels
Don’t mess around and watch the charts 24 hours, 5 days a week. Use take profits in your trading plan and you will be pleasantly surprised when you wake up and your trade has hit your take profit.
3) Accommodate for spread and NOT aiming for the last pip
One way of easing the trading psychology with your take profit plan is accommodating the spread and not aiming for your exact target.
How many times has it happened to all FX traders: we aim for a target, the currency pair misses the target by 2 pips and we eventually close the trade for 30 pips less because we want at least some profit, and considering the fact that we almost hit our take profit, and we should have had more. Or: Oh no, the currency hit my take profit but the spread was too big.
All Forex traders have gone through this thinking process. Don’t let it happen to you. Accommodate the spread in your take profit and don’t aim for our exact target: place your actual take profit a few pips below (for upside target) and few pips under (for downside target) your original profit place.
All of us have a plan or an idea where we want to take profit. So instead of aiming for the max, go xx pips below. Of course, it will depend on the time frame you use. If you are trading on the 5 min chart, accommodate the spread and give an extra pip or two. If you are using the 4-hour chart, accommodate the spread and gives an extra 10-15 pips. There is one catch: make sure that your r:r and profitable expectancy are still in the plus.
4) Use trailing stops + multiple take profits
Here too the trader must check how using trailing stops and multiple take profits influences the expected profitability of the Forex trader. This is vital. Both tools are great, but may not be suitable for your strategy, nor for your profitability. A trader must check and backtest the mechanics of these tools. Once completed, these tools can offer great advantages in the realm of trading psychology.
A trailing stop helps sooth the trading psychology because it gives us Forex traders the ease of moving the trade to break even and later on even locking profit. By doing that, Forex traders create more strength and power in staying into a higher target. Having a lot of profit but still not reaching a take profit can be very stressful. All kind of doom scenarios pop up in the mind.
What if the currency turns on me?
What if the markets eat all my profit and this turns into a loss?
I moved my trade into break even, but what if the market hits my break even stop loss and then reverses? Then I might as well close out the trade now!
Many things can speak through a mind. A trailing stop puts some of it to rest.
Multiple take profit levels have the same effect. Hanging on the take profit is not easy. But If a Forex trader is locking in profits along the way, then staying in for the next target becomes a lot easier when some money has already pocketed and some profit has been booked. We also have training on how to profit from trading.
Great take profit areas
Of course, the logical question in your mind must be: what is a great take profit area? This Forex article is going to address that in the following free FX training guide.
Your take profit should subscribe to certain characteristics:
a) Your target is realistic. For example, aiming for 1.98 or 0.74 on the EURUSD is just not realistic in the year 2013. Make sure that your take profit area is within reach;
b) Your target is preferably placed at bigger support and resistance levels and not below or above them. For example, when using a day chart do not put your take profit just above a huge weekly resistance area or just below a huge weekly support area. Rather move your take profit to accommodate that market structure and make sure that you still have the correct r:r;
c) Use Fibonacci retracements and targets for your take profit planning, no matter which time frame. These Fib levels do a great job of optimizing reward and are truly well respected by the Forex marketplace;
d) Preferably avoid aiming for a fixed amount of pips, unless you have backtested the results thoroughly;
e) Use major levels in the market. By using these major levels you ensure that you get the best exit price possible;
f) Try to find the confluence. A Forex trader has many tools and techniques at their disposal. Make sure to look for confluence when making a trading plan. That way you are placing you take profit at the best spot. Also read about the Trail Stop Loss in Forex.
Timeframe and take profits (tp)
It is important to realize how multiple time frame analysis can harm profit taking planning and capabilities. For those Forex traders who use 1-time frame for their analysis, entries, and exits, you are able to skip this section without worry. Forex traders who use more time frames, this is a crucial warning and heads-up.
1) If you enter a trade on a certain time frame, make sure to plan your take profit on at least the same if not 1 higher time frame. This process helps ensure the trader that they keep focusing on the bigger picture.
2) Once a trader has entered the trade, stay on the same or 1 higher time frame to monitor the trade. That will take the nervousness out of the trading.
3) Most importantly, do not zoom into a lower time frame after you have entered the trade! That is the worst thing that could happen because the likelihood of a trader changing the trade plan halfway the setup is very high when a trader zooms in and starts seeing reversal signs on a lower time frame.
Time factor and take profits (tp)
Last but not least, please realize that it usually takes long before price actually reaches your take profit area. Typically this is not a fast process!
Sometimes when Forex traders enter a trade, they have the feeling that their trade should hit their target quickly and panic if their trade does not materialize quickly.
If you have a good stop loss placement, then that fear is not needed. Of course, there is always the exception. For example, if you are trading a big fundamental news announcement like an NFP, it could be a very important factor.
Usually speaking though, it takes time before the currency reaches the take profit level. And traders need to give a trade time and space before they can expect to book their profits.
When backtesting your strategy and your currency, make sure to note down how long your trade setup actually took before it developed into a winner. It is easy to scroll through a chart and see the strategy hit your take profit level. One of the problems is that when practicing a strategy in such a way, the time factor of the trade development is overlooked: it only takes few minutes to click forward days or price data. But in real life, every candle IS an actual hour. And a person can do a ton of thinking in an hour, let alone during an entire day. A Forex trader needs to know that time factor is part of the process: patience is key.
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