First rule of thumb is to know what you will do before you enter a trade and have the discipline to stick to your plan regardless of how the trade unfolds. One method of taking profit is not 'better' than another but successful traders tend to be consistent in whatever they decide to do.
Professional traders always use a hard stop and only move their stop in the direction of the trade. Before they enter a trade they have decided at what price they will get out if the market goes against them. In other words they have calculated the maximum risk they will take on every trade before they get in. Professional traders have no problem taking small losses and understand that no trade is a 'sure' thing. Every trade no matter how well planned out, may fail. There are only two things a trader can control. When to get in and when to get out. No one knows what the market will do and it's impossible for a small trader to influence or control the market's direction.
Some traders move their stop to break even as soon as prices travels X dollars in their direction. That way if price goes against them, they can't have a loss. There will be times when you're happy you did this and other times when you wish you hadn't moved your stop to break even.
Also before a professional stock trader enters a trade they have a minimum profit target in mind. This profit target should be at least twice the risk. This doesn't mean they 'know' how far prices will go. Prices may go farther than the minimum profit target or prices may not reach the target. But having a logical target in mind is important in deciding whether a trade is worth taking.
Here are some common profit strategies professional traders use. Sometimes a combination of strategies are used to lock in profit.
1. Exit at the minimum profit target or get stopped out. This is the all or nothing strategy.
2. Scale out of a trade. Exit part of a position at the first profit target and let the rest of the position run.
3. Take profits when price retraces and touches a mechanical stop such as parabolic or ATR stop.
4. Time stop. Take profit after X number of days, candles, or price bars.
5. Trail a stop X number of dollars or a certain percentage below the current market price. This stop always moves in the direction price, never the other way.
6. Exit if price closes or trades below a moving average.
7. Trail a stop below prior significant highs or lows. In an uptrend a stop would be placed below prior lows. In a downtrend a stop would be placed above previous highs.
Each trading system has advantages and disadvantages. Markets are constantly changing. Sometimes one trading style might be better than another but you won't know that until you look back in time. That's why changing exit strategies based on what the market has done recently is usually a mistake. As soon as you change styles, the market changes and the style that you just abandoned might be the best one to use. |