Where should you take profits?

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.

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.

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.

(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.

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