Taking Partial Profits while Trading Forex: Right or Wrong?
Description: In this article, we look at the implications of taking partial profits when trading forex.
While trading forex, traders are invariably tempted to close a part of their positions after they have gone up some pips in profit. This can be done by closing half of the position and moving the initial stop loss to break even. On the surface, this looks like a good way reduce risk on a trade – but is it actually good?
How to Scale Out while Trading Forex
For many traders, the best way to scale out is to watch for the market’s reaction around a support or resistance level, and then close half the initial lot size of the position and move the stop loss to break even. The second method is to wait until your trade has gone up to 1:1 RR before scaling out. So, for example, if you bought 0.2 lots of EURUSD at 1.3200 with a stop loss at 1.3100, and you came back to see that the market has gone 200pips in your favour, you can then close 0.1 lots and move the stop loss to 1.3200 – which was your entry price.
What this does is that it ensures that if the market turns against you, you will at least have $200 in profit, going by our example. With this, the trader will be able to sleep easier knowing that he has already gained something from the market; and so, he won’t be that bothered about any sudden swings against him. It equally allows you to hold a trade for as long as it decides to run, knowing you have already gotten something from your trading. Additionally, the equity that is freed up will allow you take other trading opportunities that may arise.
Disadvantages of Scaling Out
The first disadvantage of scaling out is that it doesn’t allow a trader to obey risk-to-reward ratios. When you scale out in a position, you are basically hoping that the market will go an extended run. If this happens, then you could still achieve your initial goal. If it doesn’t happen, however, you would have tampered with your risk-to-reward ratio. The next disadvantage of scaling out is that it often ends up limiting the profitability of a trading strategy. The best trading strategies are those that are only right 50% of the time, but still deliver at least 1:2 RR ratio returns for the 50% winning trades. Now, if you have such a trading system and scale out each time, you will end up having a negative month as the stop losses get hit in full while the take profits only get hit partially. So, at the end of the day, you will have to win a much higher number of trades than you lose in order to see any sustainable profits at the end of each trading month.
So, while scaling out can seem like a good thing, it can be counterproductive if you do not do it right. If you must scale out, then you need to back it up with other trade management methods, like pyramiding winning positions.