Should You Take Partial Profits on Your Trades?
By Cliff Clark
The question for the ages for traders is how and when we should take profits. The mathematical argument says that taking partial profits is not a sound strategy. The argument states that this strategy puts us in a position where we are always hitting the bigger targets with less and less shares, while stopping out with maximum share size. Mathematically this would lead us to conclude that taking partial profits is something we would like to avoid. Mathematically this is true, but is math always right?
This isn't a simple question. We have to look at the frequency that we are hitting our targets, our partial targets and our stops. Our psychology also has to be considered. It's true to say that if we hold all of our shares for the maximum target we will get maximum profit. The unanswered question is how often will we be able to hit our maximum target? If we come up a few cents short and end up with a loss on the trade, wouldn't it have been better to have taken most of the profit along the way? Can we psychologically handle giving back that much? All of these questions have to be considered.
Also this conversation cannot be had without a conversation about managing trades. Holding all our shares for a maximum target and going “all or nothing” is a lot different than raising the stop along the way. As a matter of fact, if we raise our stop, isn't that a form of taking partial profits and watering down the trade? As you can see the question isn't a simple one. Our results will vary with all the other parameters in trading, such as the quality of the initial trade, our success rate with that strategy, and how we manage our trades. The ultimate answer is to track what you do and compare the results to other target taking alternatives. See which will deliver the most profits over time for the way you trade. Taking partial targets can be a great way to trade as long as you are not over managing and your management plan is one that you can psychologically adhere too.
2 trades for me today with +1.5R total
1st Trade QCOM +2R
148.39/149.97 exit 143.25
12% gap down under pivot support and 50ma after a strong daily double top rejection,. I took it on a congestion breakdown with a fairly wide stop, leaving my 2R target 50c over its ATR, slow but consistent move down with great RW, hit my target on the penny before it bounced.
2nd Trade AQB -0.5R
9.40/9.70 exit 9.56
I rarely trade stocks under $10 and even more rarely short them. I liked this daily chart as it broke its uptrend channel and stayed under a strong 9.50 support line enough room to its daily 50ma. I entered after a pullback with a fairly wide stop but only 1/3 of its ATR used at the time. It failed to break down with the strong market open and stayed in a narrow range.
I actually broke my plan with this trade as I lowered my stop to a pivot where price made a big bounce earlier at 11am with a large seller sitting there. My thought was that if it breaks that level again then it will likely...
1 trade for (-1R)
I took a BD on QCOM. I was worried about the target being close to the daily range, so I took a tighter stop on the 2 min chart. I am looking through PTS right now, most of the examples have 2 options for where to put your stop. It looks to me like one of the stops would be at the bottom of the main consolidation area, and the other at the bottom of where there has been a shakeout or turnaround bar (if there has been one). Due to the daily range I took the tighter one on this. In hindsight it seems obvious to take the wider stop, but in the moment it looked ok.
I was then looking at the 15 min 3BP on QCOM, but the reason I used a tighter stop in the first place was because of the range. The 15 min 3BP would have needed to have gone even further than the wider stop on the 2 min BD, so I didn't take it.
