When to take profit when you trade Forex

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Taking profits is very important πŸ™‚ This is a moment when you book your profits. Closing a trade will be different for every strategy. In this part I will share some important thoughts based on my experience.

Signals from Ma’s / Oscillators are not so great

I can still see people trading with signals from moving averages or oscillators. That’s not that bad thing. I use them too, mainly to decide to enter a trade. But they lag and that is a bad thing when you want to close trade at best possible place. As mentioned before, we can see strong moves around important levels – traders know very well where are these areas for current day or week. On top of that we have algo trading. When you are waiting for a close signal from oscillator, pros are already out of trade.

On the example below you can see 5m chart of EUR/USD. Move up was strong but it ended at R1 line (red). If you look closely you can spot long shadows on candles near R1 line. Price tried to move higher but this was a strong resistance area. We can assume that traders used this level to close trades and book profits. If you wanted to close long trade based on MACD (or other oscillator, MACD is only as an example here) then you would be so late with your decisions. Same situation is with moving averages, look how late average cross was.

take-profit-macd

Pivot points are very important

I wrote more about Pivot points earlier in this guide. You can build the whole trading strategy around Pivot points. You can also use other strategy but still use them to decide when to close a trade.

The great thing about Pivot points is that we have many types of PP based on time frame. So we have:

  • Lower than daily – for example hourly, 4h and so on.
  • Daily – Pivot line, support and resistance lines are based on previous day high, low, close
  • Weekly – Pivot line, support and resistance lines are based on previous week high, low, close
  • Monthly pivots – Pivot line, support and resistance lines are based on previous month high, low, close
  • Yearly – Pivot line, support and resistance lines are based on previous year high, low, close

Thanks to that everyone can select the best Pivots for their strategy. You trade long term? Then weekly or monthly pivots will be a good addition to your trading. Daytrader? Then you have daily Pivots and lower.

How to use Pivot points to close a trade

The middle line is pivot. Above pivot we have resistance lines, below are support lines. In most cases, we want to have on chart lines from 1 to 3 so S1, S2, S3, R1, R2, R3. You can calculate more levels like R4, R5, S4, S5 but it is very rare to use them.

The most important lines are 2s – R2, S2. Of course, price can stop at any level, but many traders will confirm that on many times R2 and S2 lines are targets for traders. That is why when price is near S2 or R2 it is a good idea to close a trade or to close part of trade.

Sometimes trend will be strong and price can move through second line to the third line (S3 or R3. I can tell from my experience – in that situation set take profit target at third line. When it is hit, close trade and end trading :).

I had times when it looked like Armageddon – trend down was so strong. I saw that there was S3 was in place but I ignored it and kept position open, hoping for move down. In most cases S3 worked, price went back above that level. Similar story with R3 line.

It is very rare for price to move behind third line – of course there may be some political or economic news. In that case price ignore important levels because we have mass orders. But these are exceptions. Trust me when I say from my experience that S3 / R3 line is your last target when you should have profit which is good enough.

Let’s check some examples:

On chart below we have 1-hour GBP/JPY with weekly Pivot Points. You can see that uptrend was strong, but two weeks in a row move ended at R3 line. Even in strong trend R3 / S3 line are respected, traders want to cash profit and in situations like this they do it at third line. There is no hoping for more or some wishful thinking.

close-trade-pivot-r3

Next we have 5m DAX. Move down was rapid but it stopped right at S2 line. If you had Pivot lines on your chart you would know that you should look for exit from short around that area.

close-trade-dax-s2

Fibonacci works great too

Fibonacci extension lines are great when it comes to set profit target.

There is one disadvantage with this method. You should know how to draw Fibonacci lines on chart. With Pivots there is a different story – lines are calculated based on formula so there is no guessing. On the other hand trading with Fibonacci is not that hard so it is good to learn how to use them.

With Fibonacci we have:

  • AB move – this is a move which is used to calculate extensions
  • Extension points above / below B point – possible exit levels

fibo-extension-lines and trade close

With Pivots we had S2 / R2 lines as most possible targets. With Fibo extensions this level is 161.8%. On many times this will be target for traders. If price goes higher we have 200% and then 227%, 238.2% and so on… But you are most interested in levels lowers than 200%.

To sum up, extensions are:

  • 127%
  • 138.2%
  • 161.8%
  • 200%
  • Sometimes traders like to use 150% extension

You can also look for areas where you have Fibo extension and other line like pivot or support / resistance. That way it is easier to select where to close trade.

Don’t forget about support/resistance lines

Traders know where important support and resistance lines. You should know that too. It is best to switch to higher time frame and there look for most important levels. Why is this so important? These lines will be profit targets for them so you should be aware of most important areas. That way you won’t be surprised with sudden direction change.

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