Common Mistake: Taking Profit Too Early
To continue my series of “common mistake” articles I want to address this very important one. I know I say that about all of them and that’s because they all are. When it comes to trading it is like a machine with many moving parts. This Trading Machine running in your brain will work perfectly unless one of the cogs is broken. Just one broken part will cause the whole machine not to run properly if at all.
In my previous article about overtrading I referenced to the fact that you should have spent enough time researching and creating your trading plan to the point where you are able to make an educated estimate as to how many trades per week you can expect. This now also applies to taking profit too soon because before you even start trading live you should have a precise entry plan, trade management plan and therefore exit plan. I will write an article solely on creating your trading plan correctly later but for now I will say that here at ElectroFX you will find the complete package on a platter, with 24/7 support, for those disciplined enough to follow it.
Let’s take a look at how the story can go; you start trading and you win 7 out of 10 trades and lose the other 3. However your trading plan had your average stop loss at 50 pips and on every win you were so happy to be +20 you took the 20. So let’s see here, you won 140 pips and you lost 150 pips, oh wait a minute, you lost 10 pips!!! OK, yes I am going with an extreme example again but you would be surprised how common this exact example actually is. Don’t make this mistake. If you created your trading plan correctly then you would have a plan for taking profit and you certainly would never risk 50 pips to make 20 pips. Simple risk/reward theory which I will also write about in separate article would stop you; it’s another part of the machine I was talking about. For now though the exit strategy of your trading plan should have stopped you from randomly grabbing 20 pips each time or perhaps you didn’t have one ???
There are a couple of things which will help you stay away from the mistake of taking profit too early. Firstly, simple knowledge of risk/reward will teach that it makes no sense at all to ever take on a trade with less than a 1:1 opportunity. Secondly, when you created your trading plan you allocated plenty of thought and historical data study time to choosing the best trade management for your style. My style of trading is pure price action techniques with no moving averages or squiggly indicators; this means that I am able to use price structure to plot concrete take profit and stop loss lines as I enter a trade. I can also use price structure to trail my stop loss into profit as the trade progresses. It all seems like standard procedure to me these days but it wasn’t always that way and I know you will need to hear this stuff time and time again.
The reality is that even if you do have a complete trading plan with take profit, stop loss, trailing options and considering risk/reward, you may still find yourself exiting early. The difference here though is that there will be a little voice inside that trading machine you are building in your brain screaming at you. Over time you will learn to listen to it or fail.
I hope you take my points made in this article seriously and let me leave you with this thought. IF you have a solid plan for entering your trades, AND, at that time of entry you have a plan considering risk/reward that enables you to plot your stop loss and take profit, then you can actually trade in a set and forget style that will eliminate a whole world of emotion and never have you taking profit too early. Eliminating emotion is another part of the machine btw. Here at EFX besides teaching how to trade price action and how to manage your trades with good risk/reward, I also provide tools that allow you to trade in a semi-automated fashion and eliminate all of the emotion attached to having to watch your trades all the time. I strive to make all of these machine parts either able to run on auto pilot or as user friendly as is possible.