Lock In Profits - Key To Successful Trading
Why Lock In Profits
Asking the question of why to lock in profits, is really a silly question when one thinks about it. The whole point of trading is to make money, and locking in profits is in synch with this line of thinking. While this sounds so elementary, the vast majority of traders are unable to do this on a consistent basis. We have all heard the excuses, the market is too flat, too volatile, my account is too small, my account is too large, etc. The bottom line, are you making money? If the answer to this question is no, you might want to start locking in profits today.
How Much Should I Lock In
Are you trading for a living? Do you have a million dollar account? Are you on a 20 trade losing streak? These types of questions will determine your inputs for when to take profits. First you must determine your short-term goals. Once you know what your goals are for the week, month, and year, etc. you will begin to develop a rough estimate of how much you can make based on your trading style or system. The next step is to look at your winning trades to figure out how many of them hit a certain percentage gain. This target can be used as one of your potential spots for locking in profits. Another approach is to use the most recent swing point or fibonacci level to lock in profits. Lastly, day traders can utilize the time and sales window to determine when their play is losing steam in order to lock in some gains. Regardless of your approach or timeframe, the key is figuring out at which point you will need to take some money off the table.
In summary, locking in profits is not about winning or being right. Locking in profits is about sound money management principles. Before you become a full-time trader, did you allow your employer to deposit your paycheck, only to come back 3 days later and take 50% of it away from you. Of course not. So, why should you treat trading any differently? Traders fail to realize that locking in profits does not mean you are closing out the entire position, but a portion of it. A trader making money and then losing it in the same breath, breeds uncertainty, which leads to overtrading, constant changing of ones system, and ultimately losses. Locking in the profits builds the money management techniques which lead to a successful trading business.
Lock In Profits Charting Example
In the below chart I was able to exit a winning position right before the stock had a nasty pullback. Had I not exited the position, not only would I have given back all my gains, I would have walked away with a loss.