Running profits

One of the first rules of trading is to cut losses early while letting profits run. But how do successful traders put this into practice?

Running profits is an easy concept to grasp. When you have a successful position on a market that’s moving in your favour, keep the trade open to squeeze as much return from it as possible – with the risk that the market might reverse into a loss.

But when the markets are moving fast, it can be tricky. After all, you don’t want to keep a position open too long – you might see your profits diminish, or even turn into a loss.

A good guideline to start with is to stick to your trading plan as much as you possibly can. If you’re a beginner trader, then letting winning positions run to their profit target can be difficult, let alone keeping them open for even longer.

However, if you notice that your profitable trades could have earned you more if you’d let them run, then you might want to consider actively managing positions.

Actively managing positions

Actively managing your open positions requires a more hands-on approach than sticking your trading plan. Instead of closing your trade when it hits your profit target or maximum loss level, you shift them to reflect changes in the market.

The most common method of achieving this is to adjust your stop loss. Once your position reaches a certain profit level, you move your stop closer to the current market price.

This reduces your potential loss from the trade – and eventually, means you can start to lock-in some profit – enabling you to target a higher total return.

Traders will often begin by moving their stop loss to the point at which they entered the trade. When your stop loss is equal to your opening price, you won’t see any losses from your position, even if the market reverses – unless it gaps past your stop.

Example

1. You open a buy position on gold at 1900, with a stop at 1860 and a take profit at 1980
2. Gold’s price rises to 1940, so you move your stop to 1900 and your take profit to 2020

If gold then reverses back to 1860, then your stop will trigger at 1900. If gold continues to rise, then you can keep managing your position to start locking in profit.

When should you move your stop?

Some traders will only move their stop in specific conditions. For instance, they might wait for the market to hit a new price plateau, break a key support/resistance level or move into a consolidation pattern.

Alternatively, you can decide set levels at which to move your stop. You could, for example, move your stop loss whenever the market moves by 50% of your initial risk total.

In our example above, your risk total is (1900-1860) 40 points. 50% of 40 is 20, so you’d move your stop loss up 20 points whenever gold moves up 20 points.