Knowing when to take profits is often harder than knowing when to enter. Exit too early and you leave money on the table. Exit too late and you watch profits disappear. This guide provides systematic approaches to profit taking that balance these competing pressures.
The Profit Taking Dilemma
Every trader faces two conflicting emotions with winning trades:
- Fear: The market might take back your profits
- Greed: The trade might go much higher
The truth: There is no perfect exit. The goal is to have a systematic approach that captures a reasonable portion of the move while managing emotional decision-making.
Strategy 1: Fixed Price Targets
Set your profit target before entering the trade and exit when it is reached. Simple and emotion-free.
How to Set Targets
- Technical levels: Previous resistance, round numbers, Fibonacci extensions
- Risk multiples: Exit at 2x or 3x your risk (e.g., if risking $2, target $4-$6 profit)
- Measured moves: Pattern-based targets (flag height, channel width, etc.)
Fixed Target Example
Entry: $50, Stop: $48, Risk: $2 per share
Target options:
- 1:1 risk:reward = $52 (take $2 profit)
- 2:1 risk:reward = $54 (take $4 profit)
- 3:1 risk:reward = $56 (take $6 profit)
Pros and Cons
Pros: Removes emotion, easy to execute, known outcome
Cons: May exit too early in strong moves, may not exit soon enough in weak moves
Strategy 2: Trailing Stops
Let profits run by moving your stop up as price advances. You stay in the trade until the market tells you to exit.
Trailing Stop Methods
Fixed Dollar or Point Trail
Move stop a fixed amount below the highest price reached.
- Stock at $55, trail $3: Stop at $52
- Stock moves to $58: Stop moves to $55
- Stock pulls back to $55: You are stopped out with $5 profit
Percentage Trail
Set stop at a percentage below the highest price.
- Stock at $100, 5% trail: Stop at $95
- Stock moves to $120: Stop moves to $114
Moving Average Trail
Exit when price closes below a moving average.
- Stay in trade while above 20-day moving average
- Exit on close below 20-day moving average
Structure-Based Trail
Move stop to below recent swing lows.
- Identify significant swing lows as price advances
- Place stop just below each new swing low
Strategy 3: Time-Based Exits
Exit after a predetermined time period regardless of price. Useful for event-driven or catalyst trades.
Time-Based Exit Examples
- Day trading: Close all positions by 3:45 PM
- Swing trading: Maximum hold period of 10 days
- Options: Exit 50% of maximum profit or 21 days before expiration
- Earnings plays: Close within 2 days of announcement
Strategy 4: Indicator-Based Exits
Use technical indicators to signal when momentum is fading.
Common Exit Indicators
- RSI divergence: Price making highs while RSI makes lower highs
- MACD cross: Exit when MACD crosses below signal line
- Parabolic SAR: Exit when price crosses below SAR dots
- Volume decline: Decreasing volume on rallies
Strategy 5: Partial Profit Taking
Scale out of positions to capture some profits while maintaining upside exposure. This is often the best balance between the extremes.
Partial Profit Example
Position: 300 shares
- At first target: Sell 100 shares (lock in some profit)
- At second target: Sell 100 shares (lock in more)
- Remaining 100 shares: Trail stop for potential extended move
Matching Strategy to Trade Type
Different trades call for different profit-taking approaches:
Momentum Trades
Best approach: Trailing stops
Momentum can run further than expected. Let the market decide when the move is over.
Mean Reversion Trades
Best approach: Fixed targets
These trades have natural limits. Take profits when price returns to fair value.
Breakout Trades
Best approach: Combination
Take partial profits at measured move target, trail the rest.
Options Trades
Best approach: Percentage targets or time-based
Theta decay means time works against you. Take profits at 50-75% of maximum profit.
Common Profit Taking Mistakes
Mistake 1: No Plan
Entering trades without a profit target leads to emotional exits. Always define your exit before entering.
Mistake 2: Moving Targets
Constantly adjusting targets based on hope or fear results in poor outcomes. Stick to your plan.
Mistake 3: All or Nothing
Exiting entire positions at once removes flexibility. Consider scaling out.
Mistake 4: Ignoring Market Context
In strong trends, tighter profit targets leave money on the table. In choppy markets, wider targets rarely get hit. Adjust to conditions.
Mistake 5: Anchoring to Entry Price
Your entry price is irrelevant to where you should exit. Focus on current market conditions and target levels.
Building Your Profit Taking System
Create a systematic approach:
- Define your trade type: Momentum, mean reversion, breakout, etc.
- Select appropriate strategy: Match exit strategy to trade type
- Set parameters before entry: Specific targets, trailing stop amounts, time limits
- Document everything: Track which approaches work best for you
- Review and refine: Adjust based on actual results
Key insight: The best profit-taking strategy is one you can execute consistently. A simple approach followed religiously beats a complex approach followed inconsistently.
Analyze Your Exit Performance
Pro Trader Dashboard tracks all your exits and calculates how much profit you capture on average. See if you are exiting too early, too late, or just right.
Summary
Effective profit taking requires a systematic approach that matches your trading style and the type of trades you take. Whether you use fixed targets, trailing stops, time-based exits, or a combination, the key is having a plan and following it. Track your results, learn what works for you, and continuously refine your approach.
Continue learning with our guides on scaling out of positions and risk per trade.