Art of Taking Profits
Tuesday, August 25, 2009 | Nigel Hawkes ( Hawkeye Traders) Is this Spam?Most traders have experienced the anguish of being in a profitable trade, only to allow the trade to go against them. This often happens because the trader believes the price is only retracing and decides to stick with the trade until eventually they eventually exit with a loss.
This is one of the most difficult skills to acquire in trading. Exit too soon and the trader misses the trend run; exit too late and the positive trade into a negative trade.
Unfortunately, there is no simple answer. For example, are you a new trader or experienced trader? Experienced traders have more experience and thus more skill at identifying potential turning points. In addition, their pain threshold is higher than that of new traders. New traders inevitably trade their P & L and not their chart thus missing vital pieces of information that the experienced trader sees.
Are you scalping, trading intraday, or long-term trader? Scalpers trade differently than intra-day or long-term. They are not looking to take the meat out of the trends -- only profits. These types of traders normally will tighten their stops once they are in a profitable position because that is their primary objective -- take profit.
What do you consider profit? Yes, sounds easy but is not necessarily easy to answer. For example, simply being up a tick would not be considered profitable by most standards, since the cost of the trade has not yet been covered. If you are up 5 ticks, your trade cost would be covered so you now have a profitable trade, but do you change to a breakeven stop or use your normal stop? Again, this would depend on the type of trader you were. Scalpers would tend to move to a breakeven point whereas, intra-day and long-term traders would give the price room to breathe.
A great starting point for new traders is to use the Hawkeye Levels (allow one full level before implementing.) If you entered a long trade and the price closes above Level 2, then retraces to Level 1, exit. If price continues to Level 3 and you are trading multiple contracts, take 50% profit at Level 3 and, if price retraces to Level 2, exit. Of course this scenario is based on the fact that you entered your trade between the Hawkeye Level Zero and Level 1. Additionally, as your trade progresses, you will notice that, quite often, the Hawkeye Stops are actually closer than the Levels and, therefore, would again prevail as your stop.
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