How do You Take Profit in Trading?

Hi, welcome to this new video. The topic today is really, really, really important. And it's about how to take profit in trading. Often it's very easy to decide where to cut loss in trading. Why? Because we can set our stop loss. Even though it's painful, even though we don't like to eat. Stop loss. Well, we have the stop loss. So when the price is hitting that level, automatically we sell. But where to take profit is not as easy. Because where to take profit is more discretionary. I would say there are many ways to do that. And today I want to review three of them. You can see here we will discuss about these three. Fixed target, price, action base and indicators based. So let's start with the first one. Fixed target. Probably you heard this already. Maybe they call this R with some other symbol. But the main idea is the following is very simple. The idea is that I risk 1R. So my 1R is my unit of risk. What does it mean if I enter here? So I buy at this level and my stop loss is here. This is my 1R, the distance between entry and stop loss. In other words, if let's say this is $10 and this is $9, my 1R is. That's right, $1. What does it mean? That theoretically every share that I buy, in the worst case I will lose $1. Because worst case, if I buy at 10 and then I sell at 9, I lose $1. So this is very important for position sizing. I made a video about that. And of course you also have to remember that this is theoretical. Because stop loss is a level that is a trigger. But in case of a gap down, for example, your execution price may be way below the stop loss. But let's not discuss about this now. What we want to discuss about is this. The take profit. So what is the idea here? You see two R. It means if I risk one, I want to take profit at two. In other words, when I am right, I make two. When I lose, I lose one. And I will show you in the next slide why this is used. What is the rationale behind now? One question you may have is okay, why two? Why not 2.5, 3 or 10 or 0.9? Why two? Well. Well, there is not a reason. Two is just an example here. The idea is that these numbers don't make any sense. If we don't also specify another important thing, that is the winning rate. But everything will be clear in the next slide. For now, I just want to highlight the pros and the cons. So the pros of this approach of the fixed target is that it's easier to assess the profitability of the strategy because you only have two outcomes. Either you hit stop loss or you hit your target. So when you are looking at how many times your strategy is winning, the winning rate is very easy because you only have two outcomes. But the cons is, okay, you take profit here. What if the price is going up, up, up? Well, you may basically take profit too early. That's the call. And now, as I said, you may ask, okay, but what is the best level? What is the value to put here in order to get the best result? To understand this, we need to look at this curve that is called the winning rate versus the reward to risk ratio. What is the idea here? Now this line is called the break even line. Break even. And everything above here is. Profitable. And everything here is not profitable. Let me explain. Let's say that you have a strategy with a winning rate of 60%. So you are here. And when you win, sorry, when you lose, you lose one. Let's write it here. The winning rate, as example is 60%. When you lose, you lose one, You lose one. And when you win, you win two. Is it profitable? Now if you look at this curve, you have to look at this winning percentage here. This is the reward to risk. So when you win, you win two. When you lose, you lose one. So the reward to risk is two to one. So two. Right. And this point here represents your strategy. And since we are in this area, we are profitable. This is a profitable strategy. How to see that with numbers, we need to compute what is called the expectancy. What is that? Well, it's basically the winning rate times the reward minus one, minus the winning rate. That is the losing rate times the risk. In this case it will be when I win, I win two. So this is my reward. My winning rate is 60%. My losing rate, of course, is 40%. And when I lose, I lose one. So if you compute this is 1.2 minus 04 is 0.8. And if this number is positive, it means that your strategy is profitable. So you are in this part of the curve. But let's suppose now we have another strategy. Let me remove everything. Suppose now we have a strategy where the winning rate is 80%. But when you lose, you lose one. And when you win, you win 0.1. Is it profitable? Well, 80% is here. 0.1, I would say, is around here. So you are here, right? Is it profitable? Is not profitable. And if you do again the same computation, we have Done before. What is the expectancy? Well, is 80%. So 0.8 times 0.1, minus 0.2, that is the 20% times one. And this number is negative. Okay, it's like 0.08 minus 0.2, so it should be minus 0.12. So it's not profitable. That's why you need to be careful when some people tell you, oh, you know what, my system has a winning rate of 90%, 95%, 80% is great. But then you have to ask them what is the reward risk ratio? Because if they have a system where they win 90% of the time and when they win, they win $10. But the 10% of the time they lose, they lose $1,000, then it's not profitable. So now you know why this is very important. And you also know why this can be used when you have a fixed target. Because when you have a fixed target, then you can understand what is the winning percentage. Because you only have two outcomes. Either I win or I lose. Either I make my target, I reach my target or I reach my stop loss. So this one very important. As I said, how can we. The question you may have is how can we decide the reward is for our strategy. Now, many people, they have this theory, they tell you, oh, you know what, there is no right or wrong. It depends, blah, blah, blah. I mean, it's true that there is no right or wrong, but it doesn't mean that you can choose any number. There are two things you have to consider. Number one, Suppose you have the choice between a system where the winning rate is higher but the reward to risk is also. Let's consider two scenarios. Say that you have a system. One, the winning rate is 60%. Okay, so you are here. And maybe when you win, you win two. So the reward to risk is two. But then you have another system where the winning rate is only 30%. So you are here, but the reward to risk is 10. So it's far here. Now, if you compute the what is the best strategy in terms of return? If you compute the expectancy. So remember the formula we had before. This one should be better. Okay, why? Well, if we do the computation here, we have 06 times 2. So 60% and we win 2. And in the 40% of the case we lose 1. Okay, so as before, 08. But here we have 30% we win 10 and 70% we lose 1. So what is this? This is 3, right? Minus 07 is 2.3. And this is larger than this. So in terms of profitability, this strategy is better. The question is, are you able to use a strategy where seven times out of ten you are losing? And this is related to psychology. Some people cannot do that. For some people, they want to have a strategy where the winning rate is higher. So they are accepting to have a strategy that is less profitable because psychologically they can only accept a winning rate that is not too low. But for some people, they don't care. They trade like a computer in a way. So even if they are losing 70% of the times because they know that the statistics tell you that the strategy is profitable, they trust the strategy. So this is one consideration. Psychologically, can you accept a winning rate that is low? The second one is, assuming you have defined a winning rate, what is the best value for this is 2, 3.2.5. Now, the thing that I suggest you to do is not to choose a number randomly. What you should do is to really take your trading journal. And I really hope you have one. If you don't have just start. So it can be an Excel file where you record all your trades, entry price, exit price, and date, when you buy, when you sell a number of shares, things like that. And you need to go and check all the trades you have taken. And then you can ask yourself, what if I put a target at 1.5? What if I put a target at 2? What if 2.5, 3? You can start with these four numbers. And then you see if your trade with a target here at 1.5 would have been a winning or losing trade. And then you do the same with 2, 2.5 and 3. So for every number, you will be able then to understand what is the winning rate. And then you can find this expectancy. Okay, so that's what I suggest you to do. You look back at your trades and you try to set a target at maybe these four levels. And then you check on the chart if you would have hit stop loss or not. Of course, the higher this number, the easier to hit stop loss. And you can see from the curve, if you increase the reward to risk, the winning percentage is lower. And it makes sense, right? It's much easier to get if you are here and you buy here and the stop loss is here, it's much easier to get this target rather than this, right? Because the price may be go here and then come back and never touch this level. So the higher the target, so the higher the reward to risk, the lower the winning rate. So that's the first type, the fixed target. Let's move to the second One. The second one is okay, we don't want to use a fixed value, we want to look at the price action. So we want to look for example at the Japanese candlesticks. I made a video if you don't know what they are. I made a video recently about the Japanese candlesticks that are very, very common when you look at charts. I also made a video showing some of the bullish patterns that you can identify using the Japanese candlestick. So combination of candlesticks that represent a bullish scenario. And similarly, I've done another one where I show some bearish candlestick patterns so you can have a look if you are interested. Now suppose in this case, suppose that you are using a counter trend strategy. So the price is going down and up and down. Let's say something like that. And then for some reason your strategy is telling you that you have to buy here and put a stop loss here. This is called 1Y soldier by the way. Again, it's something that I explained in the the video bullish candlesticks. Now, when you are in this situation in a downtrend, the previous high, so this level can be a potential resistance. What does it mean? It means that when the price supports the price is going up, it may start to go down again before hitting that level and continue the downtrend. Of course it can also break and change the trend. But if we are in a downtrend, it's more likely that the trend will keep going down. So what you can do is this. I buy here, stop loss is here and I put my profit here. So the take profit is not fixed at 2, 2.5, whatever, but is determined by the chart that you see. And according to the chart your level is different. Now you can also have a rule saying that for my strategy I need at least 2R. I need a reward to risk 2. So if your take profit that you identify this way is. Let's say that I don't know, this is 1R. Let's say this is maybe 1.5, not sure, maybe less. But if your strategy is telling you that you want at least two, then you will say okay, in this case I'm not able to achieve 2 before hitting a resistance. So my take profit is below 2. So I don't want this trade. That is something else you can do. But the idea is basically this one. You want to use not a fixed number that is good in every situation, but you want to adjust according to what you see. So if you are taking long trades, a target can be a Resistance or a swing high. This was a swing high support and resistance. I explained them in previous video. It can be horizontal and there is also the channel, the trend line identifying support and resistance. So you can have a look at those videos. But here I just want to use as example this one, the take profit that is the swing high. And if you are short selling, the target can be support or a swing low. Some people use Fibonacci as well. So I made a video about the Fibonacci retracement. That is a tool you can use to identify levels where the price can retrace. Meaning suppose you have an uptrend and then you are here. What you can do is okay, if you see the price is going down here, this is called the point A and this is called the point B. And the Fibonacci retracement will tell you that you have some key levels, usually the. 38.2, 50 and 61.8. Some levels where the price is likely to hit and bounce. So it can be here, it can be here or it can be here. So that was the Fibonacci retracement. But what we can do here is to use another tool called Fibonacci extension. So what this Fibonacci extension does is when you see something like that and then you see a retracement and the price is going up again, we call this point C. So with the Fibonacci extension you can identify A, B and C and the tool will tell you where the price will go before starting to go down again. And usually the levels that you can check are the 138.2 and 161.8. So it's other two levels where the price is more likely to hit and go back or maybe there. So these can be also some kind of level where you want to take profit. So there are many ways. It really depends on your strategy, really depends on what you know. Also because if you don't know Fibonacci, first you need to learn it, you need to test it and then you can use it. Don't just take any tool that you find and apply blindly. You need to test and you need to understand it. The third one that personally I don't like is indicators. Now indicators. There are many indicators. I presented three in a previous video. If you remember the Force Index, Parabolic, SAR and macd. What they do well, if you use them to filter out some stocks that are not or ETF that are not good is okay. But to use them in Order to identify possible take profit levels to me is not a good idea. Why? Because they are lagging. They are based on the previous data and this is not in my opinion, good. So there are many. You can use moving average if you want, because moving average can be a resistance. So if you are going long and then you hit a moving average, you can take profit there. You can use MACD that we discussed last time. So when the MACD is bearish and you are going long, you can take profit. Or if you are going short and the MACD turns bullish, you can take profit. You can use oscillators like the stochastics. Stochastic is here, oscillator is an indicator that is usually bouncing between two levels. So for stochastic is between 0 and 100. And usually what happens is that when the line is below 20, this is considered a overbought, sorry, oversold condition. And when you are above 80. But this level, again, some people use 30 and 70, so default is 20. 80 above 80 is overbought. So what does it mean? It means that if this line is low, is a good time to buy because everyone basically sold it. That's what the indicator is telling you. This has been sold so much that it can only go up. And when it's here it has been bought so much that it can only go down. But as I say, the problem is that these guys are lagging. Another one that you can use is the Bollinger band. What is a Bollinger? The Bollinger bands, they are these, what you see here, these three lines. So in the middle you have. Usually a moving average can be a 20 moving average. And then here these two green lines are related to. Well, there is a concept called standard deviation. Basically, let's say it's related to the volatility of the stock without giving all the explanation. But if this area becomes wider, it means that. Let's use the white. If this area is wider, it means the volatility is higher. When this is not so large, we have less volatility. So how to use that? Well, this lower line is a support line and this is a resistance line. So again, if you are for example buying around the support here, you can take profit here at the upper line because it's a resistance. But again, I'm not really a fan of this thing. I just show you because you may find it in some book, in some course, I don't know. But personally I don't really like to use them for taking profit. I. I can use Them for filtering out, to add some criteria to screen for opportunities. But that's all. I want to show you this. In a chart. Let me do that. So here we have trading views that I presented in the past. We have the S and P. And you can see here again, the stochastics is the one that I just show you. And we have the Bollinger bands. Let's say, for example, that you buy around. Let's say that you buy around here. Very good. Really at the bottom. Congratulations. Now if you buy here, you may say, okay, where to take profit? Okay, Here you may say first case. Remember we have our stop loss. Maybe the entry price is here. This is the 1R. And you may say, okay, I want to take profit at 2R. So at this level. So at this time you take profit and you make two R. Good. But the price is going up now. So you may have lost something. But you, you can never, you know, this is something that I want to tell you. You can never expect to get the price at the bottom and sell at the maximum. So it's normal that after you take profit, the price can go up. It's impossible to be able to always sell at the highest and buy at the lowest. So don't feel bad about that. Now, what was the second case? The second case is, for example, to use resistance. Now you see here, there is a pretty strong resistance around this 280. So what you may have done was I buy here, okay, stop loss here, target is here. I put my target here. And is it enough? For example, you may say, I want at least 2 or I want at least 1.5. If you trade forex, usually you, you may expect to have a lower target, maybe 1.5, 1.3 is more common. But for stocks, 2 should be okay. So, okay, you say, great, I want to take profit at the target. So again, you enter and boom, you take profit here. What if you use the indicators? If you use the indicators, okay, if you use the Bollinger band, for example, you would have taken profit around here because that's when you hit your. Bollinger band. If you use stochastics and you take profit when the price is when the stochastic is above 80, then you would have taken profit even earlier. Here it is even worse because this guy, yes, is telling you that is overbought. So people will sell. But it can stay here in this area for a long time. So you never know. It's not that every time when the line is going there, then it will immediately bounce Back. So here you would have taken profit too early and then MACD is not here, but more or less is similar. So again, what I suggest you is to really check. First check your trading journal and understand what you like. Test your strategy. Test if stochastic would have been good, if bollinger band would have been good. If using support or resistance would have been a good idea. Or maybe a fixed target. Personally, what I found in my experience is that indicators are not really a good way to take profit. So I would not suggest you to do that. But again, maybe for your strategy there is an indicator that is working. So you may test that as well. Let's go back to the presentation and I want to conclude with the recap. Again, what we have seen today. Three things. Three ways to take profit in trading and why trading? Because in investing, for long term investing is different. I will make a video probably about that. You may use different strategies because the idea behind is not the same. Anyway, for trading we have three ways. Number one, fixed target. What is the fixed target? Fixed target means we put two R2, five R whatever. And remember that when you have a fixed target, then you can see if you can compute your winning rate. And when you know your winning rate and your target this number, so the reward to risk, then you can see if you are profitable or not. Remember the curve. I show you this one, right? So you have the reward to risk and the winning rate. And remember how to see if you are profitable, you need to compute the expectancy. That is the winning rate times the reward to risk minus one minus the winning rate times one. Why one? Because this is the one R that you risk. This is the probability, the percentage of losses. This is the percentage of win. And this is the target. So the value 2.5 R2R whatever. And again to find out values that are profitable, remember this must be greater than zero. If it's less than zero, it means your strategy is not profitable. So don't even trade that. To know if to find out a value that is good and then will guarantee you a winning rate you are comfortable with. You need to look at your data. Actually if you know coding and if you know optimization, you can do it automatically. That's what I did. In my case. I have a code that will tell me exactly what is the winning rate. Given a minimum winning percentage that I imposed in order to maximize the expected value. But this is another story. Number two, we have price action. Price action means we check important levels. It can be support if you're shorting resistance if you're going long, you can use Fibonacci as well. Or you can use some of the patterns that I described in my previous video about the Japanese candlesticks. And you can also check if your target you identify with price action is compatible with a minimum requirement that you have. Maybe you want at least two R. And this can be an additional filter to decide if you take the trade or not. And number three, just for being just for introducing this. But again, I'm not suggesting you to use because in my opinion is not the best for taking profit is indicators. I show you some of them, the Bollinger bands, the moving average. You have the MACD or other indicators and then you have oscillators like the stochastic that you can use to decide to take profit. For example, if you're going long and one of these indicator is telling you bearish, then you can take profit. So with that I would like to conclude. Thank you for watching this video. Thank you. If you have any question, please ask. This is not an easy topic, but it's really important that you get it right. Because knowing where to sell or to close your position to take profit is very, very important to determine if you will be profitable or not. Because buying is very easy. If you have stop loss, you also are down with risk part the worst case theoretically. But understanding when to take profit can be challenging. Because if you don't have a strategy telling you that you may end up being affected by emotions. So if the price is going up, up, up, you will never take profit because you are because of the greed. You hope that you will keep going up and then maybe when the price will go down, you are afraid and then you don't feel good because before you had more money you want to wait the price to go there and then it will never maybe go back to that level. So eventually you will lose. So you need a strategy, in other words to prevent your emotions to affect your trading. And with that I would like to conclude. Thank you again and see you next time.