When to take profits? This age-old question has plagued traders for years. It’s difficult to be looking at a positive position and not want to take the money off the table. Often, the impulse to sell comes when you are only marginally profitable.
If you take trades off when they become marginally profitable, you are setting yourself up for potential disaster in the long-term. This approach only works if all (or nearly all) of your trades are winners and that is not reality.
If you win a little, win a little, win a little, and then lose a ton, you run the risk of wiping out your account. I have seen far too many traders driven out of the business this way.
That being said, you cannot approach every trade you put on the same way. Let’s look at directional plays for simplicity sake. I utilize two types of directional signals, “earnings-centric” and “non-earnings centric”. You can take a more measured approach with a “non-earnings centric” directional play.
You make this type of trade typically because of some technical or fundamental trigger. The expected price movement is not assumed to be binary in nature. You most likely will have time to define and plan your entry and exits. So, you can employ a measured-risk management approach.
An example of this would be to exit the signal if you realized a 20% percent profit or had a 10% loss. As long as you are right more than you are wrong, you will profit over the long-term.
If you consistently make this play with an earnings-centric directional play, you can’t just take marginal profits. Why? Because there exists the very real prospect that your trade will lose its entire value should the directional component not come to pass, meaning, only looking to take profit at 20% and not putting in a downside stop means you run the risk of allowing the ones that don’t work to become a total loss. This is how traders break their bank and go out of business.
