Sophia Todorova has a background in teaching and psychology, and as such relishes the idea of assisting new traders on their journey to Forex trading success. Technical Analysis is her passion. The charts speak, and she listens.
My colleague, Nathan Tucci recently published an article on partial profit-taking. He demonstrated that, for the most part, taking partial profits on trades, while leaving a runner very rarely makes sense.
However, I believe that partial profit-taking is an essential element in trade management, particularly for swings and longer term position trades. Here are some points that support partial profit-taking:
- Taking profit on a portion of one’s trade at a resistance/support level ensures that you to still earn a profit on a trade in the event that it does not reach the main target you had in mind.
- Partial profit-taking allows you to hold a trade for an extended period with the satisfaction of having already earned on the trade. From a psychological view-point, it is easier to relax and let the trade run as planned.
- Another advantage of taking partial profits on trades is that this frees up equity, and enables the trader to take advantage of other potential trading opportunities.
The evidence and arguments put forward by various writers on the insignificance, or disadvantages of scaling out of trades, are obviously not without merit. However, I intend to prove that this strategy can be advantageous, maybe even critical to successful trading. My caveat is that if one is going to apply the strategy, the overall potential for the trade to go beyond the initial profit target should be reasonable. Secondly, scaling out of a position will indeed put you at a disadvantage, because in doing so, if the trades are not well planned and managed, you could easily find that the losses sustained from stop-loss hits will exceed what you actually gain from your winners. This is because the stops will usually take you out for a loss on full positions, unless a strategy is also in place for scaling out at different levels for a loss.
My answer to the dilemma is to scale back into trades on retracements. In this way, you will be able to experience the full potential of running a trade, while also taking profit along the way.
Below is an example of how I would manage a trade using the scaling out method. The trade in this example is based on the weekly timeframe, so I believe there is potential more much more downside. However, the 4hr has been in a horizontal range for quite some time, so while waiting for continuation, here’s how the management could nicely include partial profit-taking:
Thanks for reading, and please feel free to give us your own take on the topic. Good trading!
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