Category Archives: Trade School

Taking Profit on Breakouts

FUTURES & FOREX TRADING INVOLVES SUBSTANTIAL RISK OF LOSS. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.



FOR QUESTIONS REGARDING TRADING SPECIFIC TERMINOLOGY, REFER TO THE “TRADING TERMS & GLOSSARY” SECTION OF THIS WEBSITE.


Measuring breakouts is critical to accurately predicting the length
of a move. After you properly connect high points and low points on two
or more candles to form a pennant, you can project the length of the
breakout by measuring the back of the formation, top to bottom. There
is a bit of an art associated with it, so it’ll take some trial and
error to improve accuracy, but with practice it’ll be like throwing
darts for bulls eyes.

With that precise measurement, you can set a take profit stop for max gains. Using the trailing stop method, mentioned in the Trading Plan,
you can lock in gains in case the move doesn’t reach your projection.
With the two combined, you’ll lock in gains and have the possibility of
maximizing gains on the take profit target.

In some situations, you may not want to use a take profit target.
For example, if you happen to catch the beginning of a reversal or the
start of the day’s move, you may want to set a much larger take profit
target for something closer to the average daily range of the pair
rather than a take profit target based on the breakout formation. In
either case, a trailing stop, once activated, will lock in profits and
a break even stop loss will prevent losses. (A trailing stop of 20
pips, for example, needs to move profitable by that amount before
activating.)

Playing breakouts, setting stop loss to break even, entering
trailing stops and using take profit stops will greatly improve
performance over time as this strategy eliminates large losses,
prevents smaller ones and locks in gains.

Spreads vs. Synthetic Positions

Calling the direction in a stock can be exhilarating. The lure of leveraging your call to enhance your gains can provide amazing, intoxicating results. But that’s just it…

Fear and Greed rule the market. Synthetic positions do nothing to mitigate fear and greed in your trading. A synthetic position, a combination of calls and puts to create a long or short position, allows for limitless gains…and unlimited loss.

Rather than placing a good trade that simply gets away from you and risking the loss of your entire account, play a spread and remove fear and greed from the equation.

Spreads consist of a either two calls or two puts on a security in the direction of your choice. By choosing a call or in the case of RIG, a put spread, you limit your losses, and the fear associated with carrying the position, to the cost of the option premium. Your gains are limited too, removing greed from the equation, and providing a built in take profit discipline. No more will your gains simply disappear as you hold on for more while the stock moves against you.

Stick with spreads or hold the stock itself with appropriate stop losses and gain targets. You’ll be a happier and wealthier trader.