A Take Profit Setting Guide.

Everything that has a beginning has an end, even good things, like a trade that moved in our favor. We have already learned about how to put brakes on trades that refuse to obey our bias aka; how to set a stop loss. This lesson is the direct opposite of the stop loss setting guide; hence it is time to learn how to set a take profit using some of the mainstream ways.

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Greed in trading is not only about over-trading and risking more than enough; it is also about targeting over ambitiously or having no target in place at all. The take profit option, I believe was created to manage that emotion. Therefore, it is only prudent for us to explore the many ways in which we can do so judiciously.

Once you have an entry, it is sensible to have an exit especially when you are trading from a higher timeframe. Exits come in the form of SL & TP and as already known, we will cover the positive exit today.

In this lesson; I am going to explain five ways of taking profits (using chart patterns, Fibonacci expansion, support and resistance, Risk to reward and open trades). Also, you would learn about the one I recommend the most.

Chart Patterns target setting.

Chart patterns are formed usually after the market trends strongly. They are the consolidation phase of a trend and as we already know; no market moves in a straight line so there will never be a shortage of chart patterns on our charts. After a strong uptrend or downtrend, the market will pause and take a breather; this is when it decides to continue with the recent trend or reverse to an opposing trend.

With those consolidation phases of trends, there are textbook approaches on how to take profit on them. On formations such as double/triple tops/bottoms and head & shoulders and its inverse, we are taught to measure the height of the formation and use it as the target. On wedges and triangles, we are taught to measure the height of the already established trend together with the range of the formation and use it as a target. These measurements for targets are true for every chart pattern out there.

It is a good way to find targets; but you need to combine it with support and resistance in order to prevent leaving some profits on the table or entering trades with a bad R:R . I became skeptical about using measured targets right after I discovered support and resistance profit taking was the juice. We would learn more on it below.

The height of the recent trend plus that of the triangle was about 200 pips. After price broke below triangle support, it took off for about 200 pips as well. A measured objective would have worked right here.

The height of the recent trend together with that of the bearish pennant (it can also qualify as a triangle or wedge when viewed in different timeframes), was about 800 pips. After support was broken, it lost more than the measured target.Later, another similar structure was formed but it found support, although it was classified as a false break.

The height of the head and shoulders was about 350 pips but it could not even drop for more than half of that. It bounced up right on support.

Taking Profit with the Fibonacci expansion tool.

The Fibonacci tool is a great one but on its own, it is nothing. When used with candlesticks, support & resistance and trendlines, it can reward traders with profitable trades. The Fibonacci retracement tool is used for finding trade entries; whereas the Fibonacci extension or expansion tool is used to predict potential take profit levels. The focus now is on the expansion or extension tool.

Fibonacci expansion levels; 61.8, 100.0, 138.2, 161.8…

Most of the time the expansion tool is used when there is no clear support or resistance level in place when looking for a trade’s target. The expansion levels come in handy since every level can act as a possible take profit.

There might also be clear support and resistance levels, but hardcore Fibonacci traders still use the expansion tool for target confirmation. That one is based on a principle that the deeper the retracement, the more extended the target will be. Conservative Fibonacci traders, however, target the 100.0 level whereas aggressive ones target above 100.0

Visit this topic for video access to Fibonacci expansion and extension usage all alike.

Support and Resistance profit taking.

Support and resistance profit taking is one of the styles I recommend when it comes to take profit setting. When you think about it any price that a market reverses was once support or resistance, if not the reversal establishes it as one.

As a price action trader, when you’re scanning your charts for trades look out for support and resistance levels and make sure they are reasonably further away from your potential entries before executing the trade. Support and resistance targets should be reasonably further away for it to contribute to a good risk to reward.

When your potential trades have support and resistance levels that are so near that the R:R wont be 1:2 or more, you might as well let that trade idea go. I don’t know much about you but a trade with a high risk to small reward ratio is a bad one for me even if I profit from it.

A short entry on the break of support would have met target right on the next support level.Provided the support level which is the exit holds true and bounces price up, a long entry’s target would be the former support which was an entry level; since it would now be acting as resistance.

Risk to Reward profit taking.

The fourth way of taking profits is by measuring the risk to reward and this one another good one of course. The first criteria for using this one will still need support and resistance levels that are further away from your entry point. This is to prevent price from sharply reversing at a strong level to hit your stop loss.

Now, after realizing that the levels are further away from the entry price, you will not care whether price would reach a marked support or resistance level. This is because you are strictly targeting 1:2 or 1:3. For such a take profit style, 4:1 is ambitious and more than that is over ambitious.

I took this trade and exited at 3R but oh boy! how I wished I exited at support.

Open trades.

Even though support and resistance levels are the ultimate when it comes to taking profits (that is my opinion), it also worthy to note that, nobody really knows where and when price will reverse until it does. All else is prediction and the one whose prediction favors him frequently is termed as good.

Based on the notion that nobody knows the tomorrow of these markets (in the retail traders’ case), there are traders who do not set take profit levels at all. Market may never reach a level, or it may reach a level but will not reverse and strike through it massively. Such is what we have been witnessing in the USDCHF recently.

Since a trend may last longer than enough, such a trade would be left open and it will take a stop loss to take profit. And that stop loss is of course a trailed one. Or a manual close may be triggered once the trader thinks he or she has had enough. Such trades can give as much as 1:10 but they do happen rarely.

As you can see, price reached resistance and pushed through it without hesitation; retested it as support and continued with the bull run. This style is similar with trend traders. The market ranges more than it trends, so when a trend forms; they’d want to capture almost all of the whole move. They do so by moving stop loss below higher lows in an uptrend; and above lower highs in a downtrend.

With raw price action, everything is in the lines. If you figure out how to use your lines correctly, you’re good to go. All the above are ways you can use to book your profits but if I were to stick to just one, I would stick to using support and resistance levels to identify the potential profit taking targets.

Aside that, I would favor the Risk to Reward method second and the open trades third. I would still use support and resistance to find targets for chart pattern and Fibonacci trade ideas.

What’s your view on this piece? What method do you use in identifying your trade targets? I would like to know in the comment section below!