Trading is never going to provide you with a neat, reliable pay check at the end of each month. It’s a game of ups and downs, and the successful trader keeps a level head, using a bag of tricks and tools to take advantage of the good times, and to stem losses in the lean times.
Here, I’ll give you peek at the techniques I use to ensure I maximize my profits when my trading strategy hits a purple patch …
1 • Let profits run
While it’s very ‘British’ not to want to look too greedy, we shouldn’t be shy of pushing our profit targets for ambitious goals – as long as we have a trailing stop locking in profits as we go.
If you’re following a trend, they will often run much further than expected by pundits and doomsayers. And it’s these occasional big wins that will balance out the numerous small losses we experience in the down times.
2 • Lock in profits
Trailing stops are an important part of letting profits run.
Your trailing stop needs to be tight enough that you can let the profits run, confident that there is a portion of that profit locked in already. But not so tight that you get knocked out by every bump.
3 • Compound
Compounding your winners is the only safe way to increase your stakes, without increasing your risk percentage on trades.
So, if you’re risking 2% per trade, and your trading fund has just had a boost from £5,000 to £5,200, then you’ll be looking to increase your risk per trade from £100 to £104. It’s a subtle shift, but over time can have a meteoric effect on your profits.
It’s worth noting that the positive effects of compounding in a good patch, can be knocked back by its negative effects in a losing run (where stake sizes only reduce gradually, as your fund size dwindles).
Compounding works best when you have steady returns. And if your profit curve is nice and smooth, you can compound after each and every trade, gradually increasing your stakes as your bank grows. However, if your returns are very up and down, it may be worth compounding less regularly – say, weekly, monthly, or even annually.
Have a look through your past results, and judge when you’d be best to compound. You can find much more information about how and why this works HERE.
4 • Scale out
Scaling out is when you close half (or a fraction) of your trade early, banking those profits, while letting the rest of the trade continue to the full profit target. It’s often combined with pulling in a stop level to breakeven.
You may think that scaling out would lessen the effects of a winning run, as you’re taking profits earlier, but the real benefit in this is the confidence it gives us to let that second half of the trade keep going and push the second profit target out further than you might otherwise feel comfortable with.
If you are using this method of taking partial profits, ensure that you know exactly where you’ll close your trades – it shouldn’t be an excuse for snatching at profits in an ad-hoc way. Depending on your broker, you may find that you have to open two trades instead of one, each with half stakes and a different profit target (don’t forget to half the stakes – otherwise you’ll be doubling your risk on these trades).
And finally, carefully monitor the results of this scaling out to judge the effect it’s having on your bottom line.
5 • Be wary of overbought and oversold indicators
Overbought and oversold indicators are just two of the devils on our shoulders telling us to close out profits. If the market is in a strong trend, you’ll soon have an indicator telling your that it’s overbought (if it’s an uptrend) or oversold (if it’s a down trend), and the sensible trader will think that now is the time to get out.
However, the reality is that trending markets can get stuck in overbought or oversold settings for prolonged periods before they turn around, so the trend trader needs to be wary of reading too much into them.
6 • Don’t lose your head
It’s a common mistake among traders, when things are going well, to up their stakes and risk more of their trading fund. It’s the classic gamblers’ error, and will always, inevitably end with a very steep loss.
Instead, keep plugging away, compounding profits … and wait for the profits to come to you.