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Forex Trading Strategies: Profit Taking

When it comes to trading on the foreign exchange market, it is important to understand when to exit a position. Indeed, knowing when to exit a position can be just as important as understanding when to enter a position. One of the forex trading strategies that some forex traders follow in order to ensure that they make money when currency trading is called profit taking.

In profit taking, you exit an FX trade as soon as you make a profit. The idea is that you can’t lose money if you always leave a position once it becomes profitable. (In currency trading, a position is profitable once you overcome the spread set by your forex broker. Forex brokers make money on the difference between the bid and ask prices of a foreign currency pair. You make money once you move beyond the spread.) Profit taking is a very prudent course of action for those just getting started on the forex market.

One of the main drawbacks to profit taking, as you might guess, is that your profits are smaller. Instead of waiting to see if your forex trade can garner you even bigger returns, you exit as soon as you see a profit. This means that could miss out if the currency pair continues heading higher on the FX market. The advantage is that you avoid watching a winning position turn into a losing one if things should change and your currency pair reverses course.

The opposite of profit taking is running profits. In this forex strategy, you attempt to increase your profits by sticking with a position after it has become profitable. Instead of exiting the FX trade when your currency rate pair has overcome the spread, you remain involved, hoping to reap greater profits. Because of the volatility of the forex exchange, however, this can increase your risk of loss. Those that run their profits are exposed to the risk that a sudden correction will occur, bringing about losses as they remain in the position.

Running profits is often more suitable for advanced forex traders. For beginners, it is usually a good idea to take profits as soon as they appear.

Tags: Forex Trading Strategies