Although much of risk management focuses on cutting losses quickly, a trader also needs to learn how to take profits appropriately when trading.
While it may be true that no one ever went broke taking a profit - as some traders like to quip - the fact remains that many traders who lacked the necessary discipline to take profits according to their trading plans have ended up with disappointing results.
They might even have had the painful experience of watching an initially winning position turn into a loser - a classic trading error - all because they failed to take profits when it came time to do so.
Using Take Profit Orders
Some forex traders, especially those trading forex professionally, watch the forex market continuously during their trading hours just in case it moves towards either the level that they should be taking profits at or the level at which they need to cut their losses at.
Nevertheless, individual traders who prefer to leave orders in the market so that they can do other things will typically leave take profit orders with their preferred forex broker or dealing desk.
Such take profit orders will generally be set to close out some or all of the trader's existing position at a better rate than is currently available in the market.
Take profit orders sell are usually executed when the market is bid at their level in the amount required to fill the order, while take profit buy orders will be executed when the market is offered at their level in their amount.
Furthermore, some dealing desks may provide partial fills on take profit orders if asked, especially for large transaction amounts that it may not be possible to fill all at once.
Avoid Getting Greedy With Profits
The emotion of greed manifests most often for traders when their trade is profitable and so the trader is making money. This is the nature of greed, to want to make more than you need or have planned out of a trade.
For example, a trader might have had a long position initially go in the money and the market might even have traded up to their planned level for taking profits. Nevertheless, the trader allowed their greed to take over and canceled the take profit sell order specified in their trading plan in the hopes that the market would go considerably higher.
In this situation, the market may not have traded up to the take profit level again after the order was cancelled. As a result, the greedy trader would be left holding what could well then be a losing position or liquidating the trade for a lower overall profit than they could otherwise have achieved by sticking to their plan.
Discipline Helps Overcome Greed
The above example illustrates how greed can influence a trader in making their trading decisions in a profitable trade situation. Basically, having already established a take profit level and entered an order to liquidate their position, the greedy trader instead wants to cancel the order and hold out for a larger profit instead.
To overcome this common emotional response, the trader will need to cultivate the discipline necessary to stick to their trading plan when it comes to taking profits.
In fact, a large part of being successful when trading in the forex market consists of being able to stick to your plans in either a winning or losing situation.