Hi, hi from Andrea Unger, we discussed in the past about stop loss and today I would like to spend some words about take profit.
Take profit yes or no? This is the question.
It depends, my wife hates when I say “it depends” but it depends!
It depends on the strategy we are following.
Take profit normally is a psychological help, because what you do is: you see profits, you cash them and you keep the money.
So you avoid giving the money back in case the market inverts and starts going against your position.
Normally I believe that it is worse psychologically to see profit in your account going back becoming smaller rather than looking at the market riding without being in the market.
Which means you suffer more if you have an open position and this goes back, after having been in profit, to a smaller level of profit, rather than closing a position and then seeing the market keep on going in the direction you were in the market.
So take profit in this case helps because it protects you from this nasty event where you see your profits going back and vanishing.
So, this means we should use it? It depends!
It depends on a number of factors. Now consider the type of strategy you are using.
I would say that if you use a take profit in a pure trend following strategy where you enter at breakout of an important level and you ride the trend, take profit goes against one of the first rules in trading which is “let your profits run”.
You are not letting it run, you are cutting a position so you are closing the opportunity to let the profit run and in this case I would say take profit damages your trade and damages the idea itself of the trade you opened. So obviously, if I don’t use a take profit in this kind of strategies when do I close my position?
Of course if you trade on an intraday basis you just close it at the end of the day, unless you are stopped out.
We are considering now the event, the scenario where we are making profits, okay?
If on the contrary you go overnight you let it go till you get an opposite signal. So let’s say you are long and at a certain point of time there is a setup which says “now you enter short”. Than you just reverse your position and you close it.
So take profit in this case is not good, there are also situations, it depends, where a take profit can help because it’s not a pure trend following just swing trading where, based on a certain set up in the market there is a move which starts and these moves sometimes have a limited possibility to develop and in that case finding out what normally happens you can place take profit at the level that in average shows to be good for that kind of setup.
The same thing, the same concepts, applies to counter trend strategies or, I mean, strategies based on a situation where there is an excess in the market, a move which exceeds normality, a big drop or big rise and you believe that the market exhausted this and now will show a rest, a bounce, and than you enter against that trend that has been shown.
In this case, as you are trading a reaction, this reaction has a limited possibility to develop normally, like if you are throwing a ball on the floor it jumps back, but it cannot go to an infinite level, it cannot reach the sky. So there is in that case a physical level it can reach.
It’s similar in the market, unfortunately we don’t have a formula, an equation which tells us exactly where it will get to, but studying each market we can find out, more or less, based on the setup we trade, what levels normally can be reached based on previous move.
But in this case the take profit is normal, because you just catch that portion of a move that you expect it to happen and you need in that case to close your position.
Also in bias strategies seasonality strategies, sometimes when in the period when you expect the market to move in a certain direction, the moves exceeds certain levels, it’s good to place a take profit because you believe that that’s an excess in that normal move, standard move, that happens and you close the trade.
It’s more seldom because it doesn’t happen much, but it’s possible to do it also in that case.
So to recap ,take profit yes, no? It depends! On certain types of strategies, trend-following first of all, it damages the trade itself.
On other strategies counter trend, bound strategies things like that and to a some extent also in swing trading, explosive move strategies, the take profit helps because it is there to capture the move you were expecting to ride with your trade.
That’s it, I hope you liked it, I hope it’s useful for you see you next time ciao from Andrea Unger.