Running profits: How to Maximize Your Trading Returns
One of the fundamental principles of trading is to cut your losses short and let your profits run. But how do successful traders put this into practice and make the most out of their profitable trades?
Running profits is a concept that involves keeping a successful position open on a market that’s moving in your favor to maximize your returns, with the risk that the market might reverse into a loss. However, when the markets are volatile, it can be challenging to keep a position open without seeing your profits diminish or even turn into a loss.
Here are some tips on how to effectively run profits:
Stick to Your Trading Plan The first step to running profits is to have a trading plan and stick to it as much as possible. It can be tempting to close out a winning position early, but if you notice that your profitable trades could have earned you more if you’d let them run, consider actively managing your positions.
Actively Manage Your Positions Actively managing your positions requires a more hands-on approach than sticking to your trading plan. Instead of closing your trade when it hits your profit target or maximum loss level, you shift them to reflect changes in the market.
The most common method of achieving this is to adjust your stop loss. Once your position reaches a certain profit level, you move your stop closer to the current market price. This reduces your potential loss from the trade, and eventually, means you can start to lock in some profit, enabling you to target a higher total return.
Remember, you should only ever move your stop loss in the direction of your trade. If you’re in a long position, only move the stop loss up, and if you’re going short, only move the stop loss down. Moving your stop in the opposite direction can be a recipe for disaster, putting you at risk of large losses.
Traders often begin by moving their stop loss to the point at which they entered the trade. When your stop loss is equal to your opening price, you won’t see any losses from your position, even if the market reverses, unless it gaps past your stop.
Example: If you open a buy position on gold at 1900, with a stop at 1860 and a take profit at 1980, and gold’s price rises to 1940, you can move your stop to 1900 and your take profit to 2020. If gold then reverses back to 1860, your stop will trigger at 1900. If gold continues to rise, then you can keep managing your position to start locking in profit.
When Should You Move Your Stop? Some traders move their stop in specific conditions. For instance, they might wait for the market to hit a new price plateau, break a key support/resistance level, or move into a consolidation pattern. Alternatively, you can set levels at which to move your stop. For example, you could move your stop loss whenever the market moves by 50% of your initial risk total.
Scaling in and Out of Trades Another strategy to consider is scaling in and out of positions to increase profits or realize returns. Scaling in to trades involves adding new positions to increase your exposure to a market that is moving in your favor, while scaling out involves progressively closing out parts of an open position to realize profits early.
In conclusion, running profits is an essential skill that can help you maximize your trading returns. By actively managing your positions, adjusting your stop loss, and scaling in and out of trades, you can increase your chances of success in the markets. Remember, always stick to your trading plan, and never risk more than you can afford to lose.