This is a pretty hotly contested topic in trading courses. Some say that you are a terrible trader if you do not hold until price hits your profit target. Other say that you cannot go broke taking a profit. So who is right?
In this post, I will give you my opinion on which stance is right and why I think so. I want to be up front and say that my way is not necessarily the right way. You have to figure out what works for you…but I hope that this gives you something to think about.
Now that you know how I feel about it, let's see why. There are two reasons…
Waiting For All Your Profit Could Mean You Get None Of It
If you wait for those last five pips, it could mean that price might rocket against you. Why wait for five measly pips, when you can get most of your profit now? This is probably the best argument for taking a profit early.
There is one caveat with this however. I will only do this if price action is showing me that it might reverse or is indecisive. If price looks like it will continue down to my target, I will hold on for as long as I can. But at the first sign of reversal, I'm outta there.
Taking A Profit Can Cure Indecision
Is there some important news coming out? Has the market been crazy lately? Did your dog chew up all your underwear?
Then taking a profit can get you out of the market and save your sanity. The name of the game is not only capital preservation, but mental preservation. If you are able to take some money out of the market and sleep better at night, then taking your profit early may not be such a bad thing.
Of course all of these benefits also come with a downside. If you take your profit too early, you can be taking small profits and large losses, leading to a negative expectancy. If you second guess your system, you can undo all of the hard work that you did backtesting your system. I believe that taking your profit early should only be done occasionally and selectively.
Keep a trading journal and note when you took a profit early. If you are taking a profit too early, too often, this will also show in your trading results. Adjust your trading as necessary.
Taking your profits early can be a good thing, but only experience will tell you when it is a good idea to do so or not. So remember to put in your screen time and watch the live market. That is the only way to get a better feel for when you should take your money and run.
I'm not saying that I'm always right when I take my profit early. What I am saying is that you should remain flexible in your approach and give yourself the ability to do so, if you think it is necessary.
What do you think? I would love to hear your opinion, leave a comment below.