Profit management

Taking your profits

Is it better to use ?

- A Take Profit limit order (TP)?

- An automatic Trailing Stop (ATS)?

- A manual Trailing Stop (MTS)?

Let's discuss about these three cases :

1/ A TP should be used if you must leave from your trading station and/or if you think the market is in a trading range. Else it's always better to use a TS because one must let the profits run!

2/ An ATS should be used if you must leave your trading station and you think there is an underlying trend (market is not ranging). So you set your ATS on metatrader and leave from your PC. Metatrader will follow and lock your profits automatically.

The drawback is that your ATS doesn't fit the market volatility thus your order can be closed as the trend is always running. Profits are locked but not optimized!

3/ Using a MTS is the best solution when there is an underlying trend because your profits are locked and in phase with the market volatility.

Procedure to manually set a Trailing Stop

A Trailing Stop (TS) is used to lock profits when your position has hit a given profit. A TS must follow the price and/or trend indicators like Moving Averages.

If you follow the price move your trailing stop each time the price makes a break-out : a High[1] break-out (BO) if you are long, a Low[1] break-out if you are short. When a BO occurs on the High[1] move your TS just under the Low[0]. Wait for a new bar and a BO to move again your TS. And so on...

When the market will reverse, your stop will be hit, and your profits taken.

Finally as the time passes one must increase the TF to place the TS. Imagine you open a position at 1 pm on a 5 min TF then at 1:20 pm you should follow your profit on a 15 min TF and so on.

Let's take a look at these audusd charts.

Screen 1 :

One can see two shorts opened :

Short 1 @ 0.9021.

Short 2 @ 0.9073.

Ask is 0.9061, we are on a 30 min TF.

Short 1 is not profitable yet. It has no SL or TS.

Short 2 is profitable and has a TS@0.9072. Short 2 is protected against a market reversal.

Screen 2 :

We are always on a 30 min TF. Market is ranging.

Short 1 is not profitable yet. It has no SL or TS.

Short 2's TS has been moved to 0.9067. There are several support and resistance between Ask and TS.Short 2 is protected against a market reversal and profits have increased.

Screen 3 :

Market has moved in the good direction. Ask is 0.8990. 30 min TF.

Short 1 is now profitable. A TS has been put @0.9018 just above the High[2] to secure the 3 pips profit.

Short 2's TS has been moved to 0.9054. Profits have increased.

Screen 4 :

It's almost the same time than screen 3 but now we are on a H1 TF. It's very useful to ponder different support/resistance levels. Ask is 0.8987.

Short 1's TS is inside Bar 0. Not especially a good choice but position is protected. A good trader never let a profitable trade turn into a losing one.

Short 2's TS is @0.9054 but it would be a good idea to move it @0.0925 just above the High[0].

Screen 5 :

We are now on H4 TF. A market reversal has occured.

Short 1's TS has been hit and a very little profit of +3 pips is taken.

Short 2's TS has been moved to 0.9033. +40 pips profit are secured! Unfortunately the market reversed and TS was hit.

Conclusion

In trending markets a MTS is the best method to increase your profits! An ATS is also an excellent choice.

In ranging markets it's better to take your profits near the upper/lower Bollinger bands and/or when you feel an overbought/oversold price.