HomeTradingAn Integral Trading Lesson: How to Let Profits Run
Learn to Trade
by Rob
July 24, 2015 Updated October 17, 2023
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5 votes
Reading time: 3 minutes
What do you think are among the most profitable of all trading skills? Maybe being an expert technical analyst and spotting high-probability trend set-ups? Or perhaps being ultra-precise with regard to risk, entries, and exit points? Now those are all important, sure, but being profitable overall is actually much simpler than that: It's all about knowing how to limit losses and let profits run, and we're going to examine a big part of that equation right here today.
What do you think are among the most profitable of all trading skills? Maybe being an expert technical analyst and spotting high-probability trend set-ups? Or perhaps being ultra-precise with regard to risk, entries, and exit points? Now those are all important, sure, but being profitable overall is actually much simpler than that: It's all about knowing how to limit losses and let profits run, and we're going to examine a big part of that equation right here today.
You see, if you're doing well to manage risk, most trades are likely to end in one of two ways: 1) a small profit; or 2) a small loss. Every so often, though, when you get on the proper side of a trend, you have the potential for a runaway winner that can make your day, week, or entire month if only you can let profits run and not back out of that winning trade too soon.
Surprisingly enough, though, that often proves difficult for many traders, so let's examine the common obstacles and help you develop a clearly defined system for managing winners in progress and cultivating the skills and confidence to let profits run.
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If you ask experienced traders about the toughest lessons they learned along the way, you might be surprised to hear that things like overcoming losing trades aren't among them. Managing risk certainly is, but also near the top would be learning how to let profits run. That's because it's an acquired skill that doesn't come easily or naturally to most traders for these reasons and others:
Fear of Loss: Practically nothing frustrates the pros more than selling winners too soon, yet it happens all the time because our natural inclination is to take profits and get out before a trade can turn against us. This fear of loss is hard to overcome, but it goes to show that in learning to let profits run, you also have to learn to go against conventional wisdom, and this is one of many instances when trading will require that of you.
See also: Conventional Trading Wisdom That Contradicts Itself
Past Trades: Often swayed by their desire to "make up for" a recent losing trade, or while trying to preserve a winning streak, traders are far less likely to be patient with a winning trade and let profits run. Instead, motivated by money, they'll abandon their strategy, which is especially ill-advised if the initial basis for the trade remains intact. And, even worse, it doesn't work, and may well cause them to leave plenty of additional money "on the table."
Outside Influence: If you've ever let the news or financial media "talk you out" of a trade, then you know: There's always some critical risk factor to watch for, or a hot, new opportunity that's unfolding, but that need not impact the way you manage the trade at hand. In fact, many like to avoid that outside influence altogether by simply choosing to "Set and forget."
As you see, traders largely struggle to let profits run as soon as their thought process leaves the present and moves off into the past or future, and that's why it's so important to have a clearly defined process for managing trades as they are working out. When done consistently, the following should keep you focused and impart some set trading rules you'll then follow in order manage winners more efficiently and let profits run.
- Set an Initial Profit Target: Knowing precisely when you'll take action is crucial, because without it, you're just "winging it," and could easily give in to fear or emotion and sell too early. Look left on the chart to determine your profit target, whether it's a previous high or low, or perhaps a Fibonacci retracement level.
- Close Half & Move Stop to Breakeven: Once price reaches your initial profit target, you'll quickly close half your initial position and book those profits, then move the stop on the remaining half to (or perhaps just below) the initial target level to protect against downside risk.
- Let the Remaining Position Work for You: With profits booked and your new stop placed firmly at (or just below) breakeven, you've now created a virtual "set and forget" scenario where you can let profits run with confidence and peace of mind. If the trend continues, you'll be able to participate in the move, and if not, your remaining position will be stopped out at or very close to where you took half, but may have been content to take full profits, anyway.
Every so often, you may find yourself in the driver's seat as a trader, decidedly in the black after a trend moves strongly in your favor. And when that happens, it's no time to be complacent, or to simply take your money and run.
These are the trades you dream of, and how you handle them over time can make your entire career! So make it your business to take the above steps to let profits run—you'll be a better and more prosperous trader for it. Afterall, markets are random in nature and won't always go in our favor, so when a market is working for you, don't be one to get in its way!
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