Scaling in and out of Positions: Taking Profit at Key Levels

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Video Transcription:

Hello traders. Welcome to the Price Action Course and the Seventh Module Trade Management. In this lesson, we are going to teach you how to scale out and trail your stops to take profit at key levels. This is very important. As was correctly positioning your stop losses, taking profit or knowing how to take profit and when to take profit is key. Because some traders or most traders out there are looking for the homegrown trade, they are looking for the 1000 pip trade and they leave their positions open without protecting their paper profits, which means that they might let very profitable position turned against them because they are aiming for 1000 pips or more.

This is not what we do here. We are prize action traders. We read the market. We take our position where the market allows us to with a great risk or reward. We take profit where the market tells us to take profit, because at those levels we are going to find heavy buyers or heavy sellers that might push prices in the contrary direction of our trade, which means that what we are aiming to do here is to maximize the profits that we are going to take on each and every single trade.

Using trailing stops

Remember that a good trader is not the trader that aims for a home run every single trade but is the one that takes small profits here and there and does it over and over again. That’s how you build an account. That’s how you make money trading. You don’t make money trading and hoping the market is going to move 2000 pips in your direction. You make money in the long run by taking 100 and 150 pips right here and there and taking profits and doing it over and over again.

Now, let’s start by defining why this is important. It sounds very basic but if you don’t take profit and protect your open profits, you are never going to be a profitable trader in the long run. If you open a position and try to let it run for as long as you can, you are never going to make money because you are not trading based on price action, you are trading based on your own emotions and you are letting your emotions cloud your decisions. The thing about trading is that you need to maintain a cool head and just do your thing over and over again.

Traders sometimes have great ideas and very good entries but they are always aiming for that 1000 pip trade and leave their positions open without taking partial profit. This is not what we do here. We are price action traders. As such, we must look at the market and take profits where it allows us to.

The first rule is never to take profit until at least we hit a 1:1 risk to reward ratio. The reason is because you don’t want to take profit on a lesser amount than what you are risking on the trade. The reason is because sometimes you are going to get stopped out. If you are constantly taking less profit than what you are risking even if you have a winning system, you are going to be losing money because of that negative ratio. After that, we are always going to take partial profit at the next important zone where heavy buyers and sellers might be placed. After the first position or after the first profit taking, we are going to move the stops to break even and then let the rest of the position run.

We are always going to work with 50% off and total profit taking at the next zone. This means that we are going to first move. When we hit the first important zone, we are going to take half of our position off and move our stops to break even, and then we are going to let the rest run. But of course, if you see that we do have an important opposite force stepping into the market. Meaning, if you are long and we hit an important level of resistance and you see that sellers are taking control of the market, you are going to close the other 50% of your trade. But if you see that that zone was clear, you are going to move your stops below that zone and you are going to take profit at the next resistance area.

Trailing Stops in Trading

Of course this is in a long position example. Right now, we are going to go back to the same chart we used when we were talking about stop loss placement to see where the actual taking profit levels on those examples would have taken place.

All right, here we are. This is the same GBP/USD for our chart though we were looking at some clean setups. The first clean setup was this one with the entry. Let me just get rid of the second position right here because we are just going to use the first example. Now, the first position was this one right here. You can see that we already said that we were actually risking 80 pips on this trade, okay? Maybe a little less. Maybe a little more but around 77 to 80 pips on the trade after price broke on some momentum to the upside and went back and we had a morning star form right here. We hit our first target and right here you can take 50% off, okay?

Now, let’s say that we took a one lot trade right at those levels and we are taking 50% off. For how much? One hundred seventeen pips. This means that we would have made on this trade around $1,117. Not around. Around $100-120 let’s say, okay? Now, this is of course, 1100 pips, $1120 if we would have taken 100 of our position off here. Now, if we take half of our position off at this level, that would mean that we would have made on 50% off, $560, okay? Now, this is very good because we already made $560 and we were risking about $770 on the full position. If we already made $560 on 50% of our position, we are going to move our stops to break even. This means that our stops are going to be right here.

Trailing Stops

Now, this is what looks to be the thing to do on this trade but you need to understand that prices are making higher highs and higher lows. Now, where would a stop should go if we actually are following the price structure? Because if we just put our stops to break even, we are going to get stopped out on the rest of our position on zero dollars. Meaning that we are just going to make $560 on this position. That’s not what we are aiming to do here. What we are aiming to do here is maximize the amount of pips that you can make on one single position and taking profit at key levels. This means that you already made $560 and price made a higher high which will mean that your stop should go right here which would mean that you are going to lower your risk at 47 pips, okay?

Remember that we only have half a lot going right now, so this means that without a lot, at 47 pips we are risking on the second part of our position $235. So we are risking $235 right now and we already made $560, which means that if our stops get hit, we are still making money on this trade, but we are trying to maximize the amount of pips that we are going to make on this trade so we are going to move our stops to the previous low.

You can see the price tests these areas and we’re moving our stops to the previous lows. Because if price breaks with these lows, it means that the up structure has been compromised and has been broken with and this was actually a reversal gap field trade which means that there were heavy sellers right here that took control of the market. But in this case, they did not and the structure is still holding which means that we are still in the money on the second part of our position. Of course, if you want to be a little less aggressive, you can take out 75% and leave 25% running. But that is up to you and how risk adverse you are as a trader. “I’d like to take 50% off and let the rest of my trade run.”

So as you can see here, price tests back to this area of previous resistance, then support, and then it has again a support, making a higher high which means that we are still in an up structure and price breaks with this structure. Now, what are we going to do here? Because now we are live. This is the live market right now, okay? Price is trading or the GBP USD is trading at 15,356, so what we need to do here is just understand what price action is doing.

You can see that we have this area of resistance where price bows from where we took our 117 pips from the first half of our position and $560, and then price broke with it. Meaning, that we can move our stops right here below this area of resistance. Why? Because we continue to make higher highs and higher lows. This means that we are now re-testing this area. If price breaks below this area, it will mean that the up structure has been compromised with and this area is not holding anymore a support and that we want to take the rest of our trade off immediately.

This means that right now, we have locked in 113 pips from the second 50% of our trade. Meaning that from the second 50% of our trade, the stops are 113 pips which means that we have already locked in 117 pips from the trade and we are looking for a higher high. So we are looking at around $550, okay? Just to have a round number to work with. After this, we have a free trade or a risk free trade. Now, what are we looking at. What we are looking for is to take profit at these lows right here, okay? What we are looking at is a rally to this area which means that we have to put our targets for the rest of our position right here, a few pips below the area because we want to get field. This would mean that we would have made 272 pips if price hits our target zone. If not, we are out with around $1100 in profit. But if we hit this high right here, we are going to double our profits on the second part of our position.

This is how you trade. This is how you make money. You take profit at the key area. You move your stops to the next logical area. It doesn’t have to be break even but you need to move it to the next logical zone and then let the rest of the trade ride or run. As you can see, right now price is moving up. This candle right here has given us a very nice indication of buyers coming in at these levels because you can see that the past three, four hour candles were very strong bearish candles and then we have what seems to be a more bullish indecisive candle, and then the candle that is right now printing.

Well, prices are starting to move up which means that this trade is actually moving in our favor and we have already locked in $1100 but we can lock in $500 more or even $600 more if we hit those targets. This is how you are going to be managing your trades. After you know how you position your stop loses, you need to know how to manage your trade. If we go back, I think we had another example of a trade right here. Let’s go through this example. We went short here with our stops all the way up here. Let’s move our stops where they should be and let’s get rid of this one. So our stops are around 78 pips on this short trade. If we take profit at the next big area, it should be at this low right here, so we should be taking 227 pips at this low, which means that if we are trading one lot, we will be taking out 50% of our position. $1,150 and one lot traded to these lows and we should move our stops right here above the previous high because we are still on a down structure.

If market breaks with the previous highs, we must get out of the trade. This would mean that we would have been locking in 50 pips of our trade. This is the reason why you don’t move your stops to break even without thinking about it. Because if you move your stops to break even, you’re giving the market too much of a room to take you out with no profits. It’s illogical to move your stops to break even on a short position if you are still making lower highs. You have to move your stops to the past important area which is right here, these highs.

Of course right here, if you follow these rules, you are taken out on a 50 pip profit which would mean that you made another $250. But if you are following price action, you can see that price is starting to make higher highs right here so you can take your position out after we make the next higher high. Because if price is now making higher highs, it means that we are in a deep corrective move or we are about to break with the down structure. In any of those cases, you want to take your profits out before it happens so you would have made around 162 pips on the rest of your position. This is how you manage your trade and how you move your stops to break even or not and why you have to think about just blindly moving to your stops to break even or using what price action is telling you to use.

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