Knowing when to take profits is just as important as knowing when to enter a trade. Many traders struggle with holding too long or selling too early. Here is how to develop a profit-taking strategy.
Why Profit Taking is Hard
Taking profits is psychologically difficult because of two competing fears:
- Fear of missing out: What if it keeps going up after I sell?
- Fear of losing gains: What if it reverses and I lose what I have?
Key principle: A profit in your account is better than a potential profit on your screen. You cannot go broke taking profits.
Profit Taking Strategies
1. Percentage-Based Targets
Set a target percentage gain and close when you hit it.
- For stocks: 10-20% profit targets are common
- For options: 50-100% gains are reasonable targets
- Adjust based on your strategy and market conditions
2. Risk-Reward Based
Use your risk-reward ratio to set targets.
Example
You buy at $50 with a stop loss at $48 (risking $2).
With a 2:1 reward-to-risk ratio, your target is $54 (potential gain of $4).
When you hit $54, you take profits.
3. Technical Levels
Use chart analysis to identify exit points.
- Sell at resistance levels
- Take profits at previous highs
- Exit at moving average targets
4. Trailing Stops
Let winners run while protecting profits.
- Move your stop loss up as the stock rises
- Trail by a fixed dollar amount or percentage
- Use a moving average as a trailing stop
5. Scaling Out
Take partial profits at different levels.
- Sell 1/3 at your first target
- Sell another 1/3 at a higher target
- Let the final 1/3 run with a trailing stop
Profit Taking for Options
Options have unique considerations for taking profits.
Credit Spreads and Iron Condors
- Take profits at 50% of max profit
- Do not wait until expiration - risk increases
- Close early to free up capital for new trades
Debit Spreads and Long Options
- Take profits at 50-75% of max profit for spreads
- For long options, take profits at 50-100% gain
- Time decay accelerates - do not hold too long
Common Mistakes
- No plan: Entering without knowing where you will exit
- Moving targets: Raising your target as the stock rises
- All or nothing: Not scaling out of winning positions
- Ignoring context: Not adjusting for earnings or news
- Greed: Wanting just a little more and losing it all
Building a Profit-Taking Plan
- Define your target before entering the trade
- Write it down in your trading plan
- Set alerts or limit orders at your targets
- Stick to your plan regardless of emotions
- Review your exits and learn from them
Track Your Exits
Pro Trader Dashboard shows your average hold time and exit performance. Learn from your profit-taking patterns.
Summary
Having a profit-taking plan is essential for consistent trading. Use percentage targets, risk-reward ratios, or technical levels to decide when to exit. Consider scaling out to balance certainty with potential. For options, take profits earlier than you think - time decay and theta work against you.
Learn about the other side: managing losing trades.