Imagine you are a day trader investing in an asset you believe will increase in value. You also have a fixed profit target in the first place. However, as the asset increases in value, you are now wondering that you’re missing out on potentially larger gains by not allowing the trade to run further. Should you stop trading once you hit a profit goal or let the winning trade run? Let’s discuss the wisest decision based on various scenarios!
Why Enter a Trade with a Fixed Profit Target?
By determining the fixed profit target prior to initiating a trade, one can calculate the risk/reward ratio of the trade. Equally crucial as the profit target is the stop-loss level. The stop-loss sets the maximum potential loss on the trade, while the fixed profit target sets the potential gain.
While it’s impossible to predict individual trade outcomes as winners or losers beforehand, a consistent approach with many trades tends to yield an overall profit if the winning trades’ gains outweigh the losses from losing trades.
For instance, in day trading forex, if the average gain in winning trades is 11 pips and the average loss in losing trades is 6 pips, maintaining a win rate of about 40% is enough to generate an overall profit.
Benefits of using Fixed profit targets:
- Clearly defined risk/reward: Placing a stop-loss and fixed profit target provides a clear risk/reward ratio before entering the trade, helping traders make informed decisions.
- Objective data-based decisions: Fixed profit targets can be determined based on objective analysis of price chart tendencies.
- Reducing emotional trading: Well-analyzed profit targets help eliminate emotional decisions as traders have confidence in their trade based on chart analysis.
- Capitalizing on forecasted moves: If the fixed profit target is reached, traders can profit from their predicted price movement, ensuring a satisfactory outcome regardless of winning or losing.
Drawbacks of using Fixed profit targets:
- Skill required for placement: Placing fixed profit targets requires skill and should not be based on random hope or fear, as discussed in the next section.
- Profit targets may not be reached: The price may reverse before hitting the fixed profit target, affecting trade outcomes.
- Exceeding profit targets: Placing fixed profit targets means giving up further potential profit beyond the target price.
- Personal choice: The use of fixed profit targets is a personal decision for day traders, and they should have a clear entry and exit strategy regardless of whether they employ profit targets or not.
Overall, trading with a fixed profit target enables traders to evaluate whether a trade is worth executing. If the potential profit doesn’t justify the risk involved, it’s best to avoid taking the trade. Consequently, establishing a fixed profit target becomes a valuable tool for filtering out unprofitable trades.
What Does It Mean to Let Your Profits Run?
The expression “Let your profits run” advises traders to resist the urge to sell profitable positions prematurely. Conversely, cutting losses early is the other side of the coin. Many believe that successful trading involves heeding both of these pieces of advice: allowing profitable trades to fully develop and minimizing losses by exiting losing trades promptly.
Despite being sound advice, only a few traders actually follow it. The reason is that it is more challenging to implement in practice than it might seem. Traders often tend to take profits too quickly due to the fear of losing them rapidly. On the other hand, they hold onto losing positions with the hope that they will eventually recover.
Benefits of Letting Winning Trades Run:
- Maximizes profits: Allowing your profits to run means that you can potentially earn more money on a trade than you would if you closed it out too early.
- Reduces transaction costs: By holding onto a profitable trade, you avoid the need to enter and exit the market multiple times, which can save on trading costs.
- Increases confidence: Seeing a trade move in your favor can be a confidence booster, which can help you make better trading decisions in the following.
- Trailing stops: Using trailing stops can help you lock in profits while still allowing your trade to run, which can be a good compromise between taking profits too early and holding onto a trade for too long.
Drawbacks to Letting Winning Trades Run:
- Risk of giving back profits: Letting profits ride can be risky when the market turns. Holding trades for too long can lead to giving back profits.
- Psychological challenges: Holding onto a profitable trade can be tough. Tempted to take early profits due to market fears.
- No guarantee of profits: Profits today don’t guarantee future profitability. Allowing them to run is a gamble, as market movement is uncertain.
- No exit strategy: Without an exit plan, holding onto a trade for too long risks giving back profits.
Mastering this technique, however, requires an in-depth understanding of chart patterns, including securities and general market conditions.
How to Determine When to Book Profits Or Let Your Trades Soar?
In financial markets, volatility and unpredictability are not exceptions but rather the norm. Risk is an inherent aspect of financial dealings, and the market can shift without much warning, making it nearly impossible to predict whether an investment will flourish or flounder. Even seemingly valuable assets can become worthless, and vice versa, underlining the need for prudent profit booking by active investors after a reasonable period.
Holding onto investments for too long without occasional profit booking goes against the fundamental objective of engaging in financial markets and may discourage active participation. Postponing profit booking may lead to missed opportunities and passive investment, leaving investors vulnerable to potential losses during changing market conditions.
Determining the right time to book profits is a matter of judgment and can be considered an art. There are no strict rules, as market dynamics are subject to change. The power of judgment varies from person to person. However, some tips can be helpful in making profit booking decisions.
- Set logical price targets for selling assets and stick to them, considering the market situation and future prospects while avoiding being driven by fear or greed.
- Opt for partial profit booking in valuable assets, ensuring that you retain some holdings while securing gains.
- Observe the consolidation phase of a selected asset carefully, and consider selling when the price starts to stabilize in a narrow range. Profit booking after holding an asset for about a year can be a good approach.
- Occasionally book profits to rationalize the overall price of your holdings, making your investments more secure in the long term.
- Adopting a contrarian approach can be rewarding. Sell when the majority is buying, and buy when the majority is selling out of fear, as conviction-based value buying or selling tends to benefit during turbulent times.
- Patience can be rewarding during uncertain times. Avoid rushing to sell and wait for an opportune moment, especially after holding an asset for about a year, which can instill greater confidence for future investments.
Additionally, following the simple principle of cutting losses quickly and letting profits run can lead to consistent returns. Employing stop-loss strategies and trusting your trading system when price movements are favorable can protect your capital and maximize returns. Rushing to take profits should be avoided; instead, let profitable trades develop to their full potential.
Let your Profits Run with this Simple Strategy!
One of the most effective strategies for maximizing profits in a trending market involves setting your stop-loss order below the lowest low. As the market continues its upward movement, with higher highs and higher lows, you can trail your stop-loss order below the most recent lowest low, providing protection against significant losses while allowing your profits to grow.
When the market eventually reverses and forms a lower high, your stop-loss order will trigger automatically, securing the gains you’ve accumulated. This approach is often employed by trend-trading investments to achieve impressive annual returns.
In the case of the BTC/USDT chart provided, entering a buy position after the 10,380-level breakout and placing a stop-loss below 8,000 allowed the position to remain open for about 9 months, resulting in a remarkable 385.81% return. The risk/reward ratio for this particular trade would have been 1:20. By adopting this strategy, it becomes possible to experience several losing trades while still generating substantial profits each year.
Unlock Your Trading Potential with Leverage!
Leverage entails borrowing money to magnify potential investment returns. In trading, it involves using borrowed capital, usually from a broker, to increase position size. Forex leverage can amplify gains and losses alike. It enables traders to control larger positions with less capital, potentially yielding higher profits if the trade is favorable. However, it also elevates risk since even slight price movements can lead to significant losses with leverage.
Leverage and Profit Targets: While employing leverage, traders frequently find it necessary to establish predetermined profit goals in order to effectively control their risk. Due to the fact that leverage amplifies both potential profits and losses, having a predefined profit objective assists traders in guaranteeing that they capture earnings prior to potential market reversals diminishing those gains.
Leverage and Letting Profits Run: Utilizing leverage alongside allowing profits to accumulate can present a strategy fraught with risk. Despite its capacity for considerable profits, leverage simultaneously amplifies susceptibility to losses. In the event that a favorable trade takes an unfavorable turn under the influence of leverage, the resulting losses could be noteworthy. Leverage traders must exercise caution and consider implementing trailing stop-loss orders to safeguard their gains as the trade progresses.
Unlock the potential of the forex market with AximTrade’s unparalleled leverage levels ranging from 1:1000 to an astounding Infinite leverage. By utilizing AximTrade’s leverage, you can achieve substantial profits with minimal investment. Commence your investment journey with a modest amount of capital in a CENT account and reap the rewards of a maximum leverage of 1:2000. Dare to seize the opportunities that await you in the Forex market.