Disk 4.2 Managing Profits

After reviewing this section several times I came to the conclusion that while Guy uses a conventional technique for securing profits his main effort here is to not only teach you how to make a profitable trade but also to persuade you to hang on to your profits.

There comes a point with a successful trade that the price may move beyond the limits that you set in your planning. Too often traders allow the trade to run and run carrying all their profits with it. Unfortunately, those profits are only theoretical until they are turned into money in the trader's bank. Then, when it turns against them, perhaps when they are not looking, they lose all the potential profit they could have made from that trade.

Taking Profits

Managing Profits

So managing profits is mostly about having a plan to take a specified amount of your profits out at a pre-planned price point. This makes sure that you consistently bank profits while at the same time leaving part of your trade in place to continue to take advantage of your continuing gains.

By using a trailing stop at this stage you can lock in more and more profit until eventually and inevitably the price moves against you, taking out your stop and terminating the trade.

This leaves you with the guaranteed profit you took out when the price hit your first profit target level – plus the windfall of additional profit that came from riding the winner just as far as it would go.

Guy shows you how to manage this situation with specific rules for taking profits as well as advice on how to manage and maximise the windfall profit. As usual there are illustrated examples for both bull and bear flags, the obligatory warning to stay away from unsuitable trades and examples of how flags may fail but your risk is zero as your order is not executed under such circumstances.

Summary

Having earlier taught you how to find the trades, in this section Guy teaches you exactly what to do with them and when to exit safely with money in your pocket.