So I’ve got a profit, now what???
By James B. Stanley
Yesterday I looked at taking a GBP/CAD position in anticipation of the longer-term down-tending momentum to carry the pair to lower levels. After a nicely profitable day, the big question becomes: How am I going to manage this trade?
The GBP/CAD trade was taken in anticipation of the longer term downtrend continuing. At the outset, I used a 400 pip stop with a 900 pip profit target – expecting to hold the trade anywhere from a few days to a few weeks.
Created with Marketscope/Trading Station 2.0
Fortune was on my side as the position immediately moved in the money, and did so with quite a bit of momentum, putting me a hardy 160 pips in the trade after approximately 24 hours.
As traders, we’re all familiar with the opposite of this situation. We open a trade, only to find that the currency pair immediately moves against us – quickly approaching our stop. Most traders feel defenseless in these positions… much akin to turbulent waters threatening to capsize our small boats attempting to navigate treacherous seas.
Why do I bring up a ‘worst case-type of scenario,’ when I have a trade do almost exactly what I want? Well, that's because I’m a defensive trader. Long ago I learned that for long-term success, my focus needed to be on the potential for loss rather than how much I might possibly be able to gain. And the reason for that is really very simple.
Created with Marketscope/Trading Station 2.0
My trading capital is finite. It’s the only real tool that I have to wage my plan of attack on the financial markets. Opportunities, however, are infinite. Throughout the trading day, regardless of what timeframe I’m trading – opportunities are abundant. To further deliver this point – an opportunity is just that. There is no such thing as a ‘sure trade,’ with each opportunity potentially damaging my trading account.
Suffice it to say – preservation of capital is far more important to me than any individual opportunity might be…. So that at the very least I can live to trade another day and cease some of tomorrow’s opportunities rather than spoiling my capital.
I look at unrealized profits in a very similar manner. Profit, no matter how slight – is mine. I earned it and I want to keep it…. As a Trader – I see it as my job and duty to protect my profit.
The big question then is ‘How?’
Well, just like many other aspects of trading that question is devoid of any one definitively correct answer. This is where experience, comfort, and maybe even more importantly, risk tolerance come into play.
I can’t tell you the best way to protect profits… because there is no such thing. I can only share with you the way I’ve found that works best for me; and that lies in using price action with market support and resistance. I break down the management of my trade in a few different elements.
The first action I look to make is to move my stop to breakeven after getting a small profit accumulated. I’m very quick to do this, as its my preference to be in a trade in which I feel my initial risk is removed. I look at this type of situation as ‘playing on house money,’ as the only risk I have left is the profit I have accumulated in this position.
Some traders debate the merit of this movement, as it could cause the trader to miss out on some potential winners. I look at it a little differently:
If I have a profit on a trade, and the market retraces all of that profit and starts eating into my initial risk levels – do I feel better about:
- Price reversing YET AGAIN, and taking my trade into profitable territory
- Price continuing to move against me, hitting my initial stop
While I feel B would happen more often than A, neither situation makes me feel comfortable. At the very least, in the above situation, I’d prefer to be taken out of the trade at a small profit or breakeven so that I could simply look for greener pastures elsewhere.
Step 2) As the position moves deeper in the money, I continue to move my stop deeper in the money…. In an effort to ‘lock-in,’ profit. Like I mentioned earlier, profit, unrealized or not, is mine. It’s my job to protect it, and that's where subjectivity comes into play.
In the next ‘Chart of the Day,’ we’ll discuss the various mannerisms that I can use to protect my profit; and if we’re fortunate, I’ll have a real world example with my GBP/CAD position.
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Thank you very much for your time, and Happy Trading!
