When it comes to trading, a majority of the advice given to market newbies deals with limiting losses. Everything from using prudent leverage to having superhuman patience is stressed. Keeping account drawdowns in check is great and all ― but what about taking profits?
By far, the most overlooked aspect of trading is when to ring the cash register and move on to the next trade. Many strategies demand the use of static profit targets while implementing some form of risk vs reward ratio. Others call for dynamic management, with no finite exit price being defined.
In truth, there is no single “right” way to manage a trade. However, it is critical to your long-term success as a trader to not give too much away to the market. When a winning position comes to pass, getting the most out of it is the quintessential goal. Below are a few ideas of how to accomplish this task on a regular basis.
Three Ways To Manage Winning Trades
Unfortunately, it is impossible to make it as a trader while assuming risk and not realizing profits. When you are in on a winner, maximizing its upside potential is the name of the game. Here are a few ways to achieve just that:
- Time: Every second a position is open, you are exposed to systemic risk. For any or no reason at all, the market can reverse against you. One way to maximize the upside of any trade is to have an idea of how it will unfold. If the trade does not behave according to your expectations, simply take any available profits and run!
- Trailing Stops: A good number of professional traders specialize in trades classified as “runners.” A “runner” is a substantial directional move, typically a trend following or breakout trade. In order to grab as much of the move as possible, a dynamic stop loss is used to “trail” entry. With no exact profit target being placed at market, the winning position is free to run. In this way, big profits are possible with exit coming only when the move becomes exhausted and trailing stop is hit.
- Breakeven: Moving a stop loss to breakeven is a controversial way of managing a winning trade. Many traders will not engage in this practice due to the possibility of being stopped out prematurely by market noise. Nonetheless, once a position goes in your favor, giving back profits is psychologically draining. At the very least, moving a stop to breakeven can eliminate the brutality of watching a winner become a loser.
Not being paid off when your strategy works to perfection is the most frustrating aspect of trading. You put in the time, spotted the trade and entered the market ― only to catch a fraction of the move or sustain a loss. Sound familiar? If so, don’t worry. This scenario happens to every trader at one time or another.
As I mentioned earlier, there is no single “right” way to manage a winning position. Regardless of one’s trade management strategy, the primary goal is this: make money! If an approach or style is consistently making you money, then it is right for you!