Profit Taking Actions in Trading and Investment
Although often mentioned in trading strategies and analysis, many traders still misunderstand what profit taking action is. Find out the right way to maximize profit taking action here.
The term profit taking in trading and investing is certainly commonly heard when you are learning. This action is often associated with returns or profits after successfully executing a strategy properly.
In general, profit taking is the process of liquidating an ongoing trading position or an investment asset that has been held for some time. Simply put, this is the moment when traders have the opportunity to lock in profits.
Technically, profit taking is usually executed by closing trading positions. For example, forex traders often take profit before the release of high-impact reports (NFP, central bank interest rate announcements, etc.), while stock investors generally take profit after a company or issuer distributes dividends to shareholders.
To enjoy profits during profit taking, the current price trend must move (floating) in a direction that favors the trader. This means that a trader must hold the position until the asset price is higher than the initial purchase price, or if the opened position is a sell, then lower than the entry price.
Indicators Suitable for Profit Taking
In the previous point, it was explained that trend changes are one of the golden moments for profit taking. So, how can you track trend changes?
One way to identify trend changes is by utilizing the Moving Average indicator. This indicator provides information on price movements over a certain period of time.
To read trends and get entry and exit signals, you can use two MA lines with different periods, then observe the crossover between the two lines. If the short-period MA crosses the long-period MA upwards, it indicates a trend change to bullish and generates a buy signal. On the other hand, a short-period MA crossing downwards through a long-period MA usually signals a trend reversal to bearish and generates a sell signal.
What is the Impact of Profit Taking on Trading and Investment?
In practice, not all traders have the opportunity to gain profits when the market is dominated by profit taking actions. This is because the liquidity of the forex or stock market can be disrupted if many traders take profit simultaneously. Additionally, there is also the risk of opening positions at the wrong time.
For example, investor A hopes to make a profit by simply following the trend of buying stocks during a heavy profit taking period. Unfortunately, trader A fails to realize profits, as shortly after, the stock value experiences a correction or temporary decline. As a result, the phenomenon of being stuck in stocks or locked trading positions often occurs among novice traders.
If you are a long-term investor, profit taking actions can also cause unusual changes in your portfolio. You may see asset values increase drastically over a period, then decline sharply. This is where your commitment to the trading plan and risk tolerance is often tested.
How to Take Profit Correctly for Maximum Gains
To increase the chances of consistently achieving profits, you must learn some simple tips and guidelines for taking profit correctly:
Prepare a Strategy Thoroughly
To achieve consistent profits, you should not carelessly close trading positions or sell investment assets without a proper strategy and preparation. Generally, professional traders or investors will only commit to opening trading positions or buying assets if the chosen instruments clearly show strong potential.
If you take advantage of rumors or moments surrounding high-impact report releases to take profit, also understand that the effects of news often do not last long. Therefore, do not force yourself to take action solely because of FOMO.
Utilize Available Trading Tools
Although it may seem like simply waiting, trading is an energy-draining activity. When there are many major news events and the market is experiencing high volatility, stress levels can rise and traders may be tempted to act outside of their trading plan.
Instead of monitoring the trading platform 24/7, it would be better to use the Take Profit (TP) tool provided on the platform. To set accurate TP levels, you can apply the Price Action method or determine the risk-to-reward (R/R) ratio.