Take profits in day trading
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When do you cut your position? Should you let your trade carry or take your profits? These are questions that are often asked by novice traders. Earnings management is very important in day trading, it allows you to cover your losing trades and maximize your account’s performance.
A winning day trading position can be closed for several reasons:
- The stop loss is triggered (see Stop loss management in day trading)
- Appearance of a divergence
- Detection of a reversal candlestick
- Detection of a resistance/support zone
- Profit target met
Day trading should not be confused with swing trading.
With swing trading, the objective is to capture a large trend movement, which implies accepting rebounds/corrections. Swing positions have long-term objectives, the potential gain is large. In return, swing traders accept letting the trade breathe and not sticking too close to the price with a stop loss. Theposition is cut if the objective is reached or if your stop loss is hit.
In day trading, the objective is to take as many points/pips as possible without suffering major rebounds/corrections. It is about taking a simple bullish/bearish impulse. Protecting your winnings and minimizing your losses must be a priority. This requires increased monitoring of your positions.
Divergences are very powerful tools to detect the risks of technical corrections/rebounds. The longer the unit of time, the more relevant they are. To learn more about the differences, you can consult: technical analysis divergences.
If you detect a divergences on your trade’s time unit, you can take your profits. The divergence is even more relevant if it intervenes on the level of a support/resistance.
Japanese candlesticks are very good tools to interpret traders' psychology in the market. They work on all time units. To learn more about Japanese candlesticks, you can consult: Japanese candlesticks.
You could study reversal candlesticks and particularly the dojis that appear as a result of a bullish/bearish wave. These dojis are often a sign of technical rebound/correction.
The most common patterns of Japanese candlestick reversals are the hanging man and the shooting star in bullish trend, the hammer and the inverted hammer in bearish trend. We could also mention the bearish/bullish engulfing. These few configurations can help you to avoid a rebound/correction and take your profits at the right time.
As new candlesticks are formed during your trade, you get additional information. If the price seems to stop in a precise zone without real justification, it is certainly because you missed a resistance/support zone.
Do not hesitate to zoom out your chart to identify a trend line, a chart pattern or a support/resistance level that you might have missed during your first analysis. If you find nothing, look at the longer time units. If the price tests a longer term support/resistance, the risk of correction/technical rebound is significant. You can then decide to take your profits.
Once you reach your goal, take your profits. The only scenario where you might decide to let your trade run is a powerful bullish/bearish rally. This can be seen visually at the "head" of the candlesticks. If the candlesticks are large, with a long body and there has been no technical rebound/correction, you might decide to keep your position. But be careful, in this case, tighten your stop loss to protect your winnings. This is about enjoying a continuation of the ongoing rally, not turning your trade into a swing position.
A winning day trading position can be closed for several reasons:
- The stop loss is triggered (see Stop loss management in day trading)
- Appearance of a divergence
- Detection of a reversal candlestick
- Detection of a resistance/support zone
- Profit target met
Difference between day trading and swing trading
Day trading should not be confused with swing trading.
With swing trading, the objective is to capture a large trend movement, which implies accepting rebounds/corrections. Swing positions have long-term objectives, the potential gain is large. In return, swing traders accept letting the trade breathe and not sticking too close to the price with a stop loss. Theposition is cut if the objective is reached or if your stop loss is hit.
In day trading, the objective is to take as many points/pips as possible without suffering major rebounds/corrections. It is about taking a simple bullish/bearish impulse. Protecting your winnings and minimizing your losses must be a priority. This requires increased monitoring of your positions.
Profit taking on divergence
Divergences are very powerful tools to detect the risks of technical corrections/rebounds. The longer the unit of time, the more relevant they are. To learn more about the differences, you can consult: technical analysis divergences.
If you detect a divergences on your trade’s time unit, you can take your profits. The divergence is even more relevant if it intervenes on the level of a support/resistance.
Profit taking on a reversal candlestick
Japanese candlesticks are very good tools to interpret traders' psychology in the market. They work on all time units. To learn more about Japanese candlesticks, you can consult: Japanese candlesticks.
You could study reversal candlesticks and particularly the dojis that appear as a result of a bullish/bearish wave. These dojis are often a sign of technical rebound/correction.
The most common patterns of Japanese candlestick reversals are the hanging man and the shooting star in bullish trend, the hammer and the inverted hammer in bearish trend. We could also mention the bearish/bullish engulfing. These few configurations can help you to avoid a rebound/correction and take your profits at the right time.
Taking profit on resistance/support area detection
As new candlesticks are formed during your trade, you get additional information. If the price seems to stop in a precise zone without real justification, it is certainly because you missed a resistance/support zone.
Do not hesitate to zoom out your chart to identify a trend line, a chart pattern or a support/resistance level that you might have missed during your first analysis. If you find nothing, look at the longer time units. If the price tests a longer term support/resistance, the risk of correction/technical rebound is significant. You can then decide to take your profits.
Taking profit on target achieved
Once you reach your goal, take your profits. The only scenario where you might decide to let your trade run is a powerful bullish/bearish rally. This can be seen visually at the "head" of the candlesticks. If the candlesticks are large, with a long body and there has been no technical rebound/correction, you might decide to keep your position. But be careful, in this case, tighten your stop loss to protect your winnings. This is about enjoying a continuation of the ongoing rally, not turning your trade into a swing position.
