whether you are new to trading or you consider yourself a seasoned pro, knowing when to close out a winning trade means the difference between long-term success and failure in Forex.
There are a great number of opinions concerning trading strategies, but we feel that erring on the side of caution by taking profits is the best practice for most traders. However, this is not to suggest that you should be overly cautious.
For instance one of the best ways to trade actively, but conservatively, is to move your stop losses to a point where you either break even or make a small profit on your winning trade. Personally, even if you only lock-in a few pips, it is still far better psychologically than walking away from your trading station having lost even as little as $20. Why? Because even small gains allow you to walk away as a winner, maintaining the proper psychological mindset that you had an up day.
The number one reason winners turn into losers is because of greed, plain and simple. We have all been there, a trade gains momentum, seems to go up and up, and we get cocky and tell ourselves that will close out the position when it gets to whatever the next level is in our mind. The problem is, the trade may reverse quickly and then we begin an inner dialogue about how it is sure to rebound, how this is just a consolidation or correction, and that the long-term trend is in our favor.
Perhaps you can get away with that kind of thinking if you are George Soros, but like the rest of us mortals, the reason why so many people lose in four acts by blowing up their accounts is because they have convinced themselves they are invincible or that the markets over them a better trade.
What is worse is when, after closing out too late, desperate Forex traders will tend to use too much leverage and make risky trades in hopes of gaining a profit. But if you do not already understand the basics of when to close out a profitable trade, no amounts of magical thinking, technical analysis, or analysts recommendations are going to help you make a living trading Forex.
Another option is to simply scale out of a trade, closing 80% of the position when you are solidly in the money, then move your stop loss to let the trade run.
In a nutshell, if you find yourself in a fast-moving market, where you have already made some decent profits, establish some criteria for when you are going to get out of a trade profitably. Different people will have different targets, for some it will be a dollar amounts and for others it will be a certain number of pips, but either way set some rules and live by them and you will close more profitable trades than you ever have before.