Where should you take profits?

A constant dilemma for spread-betting swing traders is where to take profits. Unfortuntately, there is no easy answer to that.

In my last post, I described a recent trade in the EUR/USD which provided a nice profit in a two-day trade.

But I could have made a lot more by not being so quick to take profits when I did.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

This is a constant dilemma for swing traders: where to take profits. I will say right now that there is no easy answer. Let's have a look at the chart as it developed after my exit.

I'd gone long at $1.2950. I then took my profits at $1.3128 (see here for details of the full trade), basing my exit on an expected reversal at the Fibonacci level around $1.3150. However, the market had other ideas (they often do!). The euro carried on relentlessly upwards to challenge the previous $1.3430 high and then spiked above to make a new high, at least temporarily.

Advertisement
Advertisement - Article continues below

That was annoying. I could have taken an extra 200-300 pips out of this trade in a matter of a few hours. That added up to £400-£600 left on the table for my £2 bet.

I take comfort in knowing that these extreme situations do not come along very often. I made the percentage play, as most of the time in these retracement rallies of a bear market, the rallies stop at or near a Fibonacci level based on the previous wave. So now, I can throw out my Fibonacci analysis of this particular wave, as it is invalid because the 'retracement' has taken the market to a point above the pivot high of $1.3424.

SB00037-01

(click on the chart for a larger version)

An alternative protect-profit method

Instead of exiting a profitable trade with resting orders set at a Fibonacci level, I could have used a 'trailing stop' method and raised stops hourly, based on the movements on the hourly chart.

Personally, I don't like this method, as most of the time, a normal zig-zag would stop me out prematurely. So I'm afraid it's horses for courses in this matter. The main point is that it is important to have a plan in mind on how you will exit a trade when it is 'live' it's all part of the trading discipline and money management that will keep you from losing too badly on any one trade.

What is a pip?

Several readers have asked me this question it's simply trader slang for 'point', or the minimum tradable increment in price. Taking gold as an example, the minimum move in gold is $0.1/oz (ten cents). When betting £1 per point (pip), this move is equivalent to £1 in your account. A move of ten pips is a $1 move, or £10 in your account.

Advertisement
Advertisement - Article continues below

NB: Don't miss my next bit of trading advice. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here.

Advertisement

Recommended

Visit/trading/spread-betting/600782/boeings-share-price-plummets-heres-how-to-play-it
Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
Visit/519524/how-my-2019-spreadbetting-tips-fared
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Visit/519285/bettingon-politics-some-safe-labour-bets
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Visit/518916/ds-smith-will-deliver
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019

Most Popular

Visit/investments/stocks-and-shares/600863/sirius-minerals-anglo-american-takeover
Stocks and shares

Do you own shares in Sirius Minerals? Here’s what you need to do now

Mining giant Anglo American has proposed a cash takeover of Yorkshire-based minnow Sirius Minerals. Unhappy shareholders must decide whether to accept…
20 Feb 2020
Visit/investments/commodities/gold/600874/gold-is-at-its-highest-level-in-years-heres-how-to-invest
Gold

Gold is at its highest level in years – here’s how to invest

Gold's rise at a time when the dollar is unnervingly strong isn't unheard of – but it is curious. John Stepek explains what's going on, and what it me…
21 Feb 2020
Visit/economy/uk-economy/600862/britains-economy-might-spring-a-surprise-on-the-doomsayers-this-year
UK Economy

Britain’s economy might spring a surprise on the doomsayers this year

The UK economy is looking pretty good – we’re more at risk of a boom than a bust, says John Stepek. Here’s why, and what it means for your portfolio.
20 Feb 2020
Visit/517625/tr-european-growth-trust-why-investors-shouldnt-overlook-europe
Sponsored

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019