I used to enter and exit positions based on emotions rather than a defined exit strategy. Eventually, it would turn into regret in any case. Whether I exited too soon or too late, or I waited for too long or too little. All because I was glued to the screen when in a position. Every beginner makes this mistake repeatedly until they realise they have to work on their exit strategy in pre-trade planning.
Locking profits in forex can assist in eliminating trading losses and maximise your profit potential, making your trading more successful. But it requires following some processes for its application.
This article will demonstrate how to profit lock in forex on trading platforms. It was designed to help you understand some of the most critical features of the trading platform and the advantages of locking in profits while trading forex.
So, without further ado, let’s get started.
Locking in profits is the process of realising previously unrealised gains in security by closing all or a portion of the holdings. When an investor holds an open position, they may collect unrealised or paper gains or losses that are not realised until the position is closed.
For example, an investor who is long on security can lock in profits by selling their stake for a gain. They are no longer affected by changes in the underlying. It is also called “realisation” or “taking money off the table.”
Traders and investors may lock in profits for various reasons, but the most different is to reduce risk.
Long-term investors may choose to lock in profits to maintain portfolio balance. For example, an investor may have started with a portfolio divided equally across five funds. If one fund outperforms, its portfolio allocation may increase from 20% to 30%, exposing the investor to further risk.
To maintain an ideal portfolio allocation that minimises risk and maximises profits, the investor may lock in profits for a portion of the outperforming fund and redistribute the proceeds among the other four funds.
Short-term traders frequently lock in profits to generate income and reduce risk. For example, following a bullish earnings announcement, a trader may open a long position with a series of price targets.
When the stock reaches the first price target, the trader may take profits on one-third of the position while holding the remaining two-thirds until a higher price target is reached. With this approach, the trader is taking some money off the table and lowering their risk if the stock drops unexpectedly.
Traders use various types of technical analysis, such as technical indicators or chart patterns, to create price targets to lock in profits, while long-term investors may set price targets based on asset allocations or risk tolerance.
Assume you buy 100 shares of Amazon for $12, and the price rises to $36 two days later. Because the position isn’t partially or fully closed, all potential profits go unrealized. If the stock falls, your profits will fall, and vice versa if it rises.
You may elect to lock in your profits by selling 50 shares at a price of $36 each. Even if the stock drops to $1, you will still have made a profit. In other words, locking in profits allowed the investor to “play with house money.”
When a beginner first starts learning about forex trading, one of the first things they discover is what a stop loss is and how it is used.
A stop loss is self-explanatory; it prevents losses from exceeding a specified threshold. In the case of adverse price movements, it is an order to close a trade at a predetermined price. It acts as a safety net triggered by price movements in the opposite direction of your trade.
This tool is available on all forex trading platforms and is critical for risk management. It may also be used to lock in profits when the price moves in the direction of your trade.
Locking in profit means securing a trade’s accumulated profits without risking them. In other words, you protect your profits from any loss caused by adverse price movements. As a result, you secure the money you’ve already made on the trade while leaving the door open to make more potentially.
Now that you know what a stop loss is and what it means to lock in profit, let’s look at how to lock in a profit in forex.
Traders are constantly looking for ways to increase their success rate, and profit potential and avoid situations in which they lose more than they intended.
A stop loss may assist with all of them, and these are the steps to putting one in place and using it to lock in profits in forex.
Open your forex trade after deciding whether to buy or sell a currency pair.
A stop loss is a predetermined price or distance in pips from your entry price at which you will exit the trade if it moves against you. For example, if your buy entry price is 1.3500 and your stop loss is set at 1.3480 (20 pips below the entry), you would exit the trade if the price dropped to 1.3480.
You may set a stop loss when placing a buy or sell order. Alternatively, you may right-click on the open deal and then select modify.
To lock in profits, a trailing stop loss follows the price as it moves in your favour and only closes your trade if the price moves against you by a specified number of pips. You might, for example, set a trailing stop loss at 20 pips. As a result, if the price moves 20 pips in your favour, the trailing stop loss will likewise move 20 pips higher.
Right-click on an open deal in the terminal to set a trailing stop loss on the MT4 or MT5 trading platforms. Then, from the resulting pop-up menu, select trailing stop. The distance is measured in points, with 10 points equaling one pip. Furthermore, the platform must stay open for the trailing stop loss capability to function.
So, you should now have a trade with a stop loss in place. The following step is to let the trade take its course. If you use a trailing stop loss, the platform will automatically lock in profits.
As the price moves in your favour, the stop loss will trail by 20 pips and lock in profit. Until the price moves back 20 pips, triggering the stop loss and closing the deal. We’ll use 20 pips for this example, but you may place a trailing stop loss for any number of pips.
When the market has high momentum and is trending, locking profit is a fantastic technique to employ. It is also a fundamental trade management tool that any trader may use.
You may be more active by manually adjusting the stop loss when the price moves in your favour. All you have to do is modify the stop loss on your deal.
That is how to lock in a profit in forex.
Here are three possible reasons:
As your trade unfolds, there’s nothing wrong with deciding on a profit target. It is far easier to stay on a trade with a clear profit target than to complete a task with a goal in mind.
A trader’s lack of risk appetite may also contribute to early profit-taking.
Some traders would rather have that sense of certainty and bank in at a profit of $100 than risk a portion of their unrealised profits for an additional $50.
Holding on to your trade until the price reaches your profit target necessitates patience and a high level of confidence. There will be many uncertainties along the route, making keeping confidence in your trade idea even more difficult.
It doesn’t help that as your potential profits grow, it becomes more appealing to lock in those gains rather than risk losing them by keeping your trade open. They say that a bird in the hand is worth more than two in the bush.
But the frustration that typically comes with missed opportunities holds a trader back, not the potential loss of unrealized profits.
We traders tend to be too critical of ourselves, especially when our paper profits evaporate into thin air. Perhaps we cut our profits short to avoid blaming ourselves if we lose unrealized profits.
This is probably why my trading psychologist observed that considerably more confidence is required to hold on to a winning trade as it goes in your favour. But how do you achieve this level of confidence?
Trust in yourself.
Yes, it’s that easy. Unfortunately, it is not as easy as it sounds. You must be able to trust your trade idea so much that you adhere to the plan and hold on to your transactions until they reach your profit targets.
Building self-trust may be achieved in two ways:
This is the stage at which you mentally prepare yourself in case the price retraces and your paper profits are erased. In trade, for example, you determine possible retracement zones and set your trailing stops appropriately.
You’ll get stopped out by fakeouts and retracements-turned-reversals at times. Don’t berate yourself for missed profits. Instead, tell yourself that you’ve done your diligence and that there will be more opportunities to take advantage of next time.
You should do a tiny bit of the right thing at a time and build on your efforts to make more significant changes.
For example, you might attempt locking in a portion of your profits and leaving the rest open to meet your profit target or stop loss. This way, you may profit while remaining confident in seeing your trade through to the conclusion.
It’s not every day that the market goes your way. But, don’t you want to make the most of it if it does?
One way is to move your stop loss to break even. Traders frequently employ this strategy. It is generally anticipated that if you are correct, your position will quickly show a profit, and when it does, you will need to adjust your stop loss to break even to avoid losing on a winning trade.
But how far can you allow the price to fall before moving your stop to breakeven? Typically, 20-30 pips are sufficient to avoid whipsawing. However, this varies depending on the trading instrument.
Consider the GBP/USD exchange rate. A bullish move has been exhausted, and the price has failed to rise, forming a bearish triangle pattern. As the price broke through the trendline at 1.3580, we entered a short position. Our stop-loss order was placed above the most recent high, at 1.3620. As the price dropped by 1.3550 (30 pips from our entry point), we adjusted our stop-loss order to break even.
Alternatively, you might employ a trailing stop to secure your profits. Again, a 20-30 pip move in your favour is sufficient to begin trailing your stop. You may do it manually by altering your current order, or you can use an MT4 trading panel like Trader on Chart to do it for you.
In that case, remember to activate live trading while downloading and installing the application. To do so, go to Tools, then Options, and finally Expert Advisors. Finally, check the boxes for “Allow automatic trading” and “Allow DLL imports,” and you’re set.
The truth is that you do not have to wait until the market reaches your final target. We’ve previously acknowledged that we can never be certain that it will occur. As a result, you may secure the available profits by taking partial profits first and locking the rest.
That means you may close half of your positions while keeping the other half open, potentially boosting your profits. To protect your profits, you will adjust your stop-loss order as the price continues to move in the expected direction. In this way, you may move your stop-loss order to breakeven, then to 20 pips plus, then to 50 pips plus, and so on.
On MT4, you can take partial profits. But what exactly is a partial close? It is only closing a portion or percentage of your position, not the entire thing. So, if you sold one mini lot (0.1) in GBP/USD, you can close the position partially.
How? You must reduce your trade volume in the open position, which will be a partial close. You choose how much of the position to close. You may pick between regular, mini, and micro-lots on the Metatrader 4 platform.
To begin, head to the terminal, where you can view all of your open positions. Then, double-click on the open position on which you wish to make a partial close.
A window will appear. Click the number of lots you wish to close for the specified position by clicking on the volume section (or type in your preferred number). Then click ‘Closure,’ and you’ve completed a partial close. The remaining positions are still open.
Similarly, you may use additional software, such as partial close EA, to automate the closing of partial profits. Because partial closing requires a few steps, using an app may appear excessive to others. It all depends on how much you want to automate and how much you want to perform manually. That is all up to you.
Instead of double-clicking on the open order, you may right-click on the order you wish to close partially. A window will appear, offering you the opportunity to pop your order. You must select ‘Modify or Delete Order.’
Another window will open, and under the ‘Type’ box, you must select “Market Execution” or “Instant Execution” (depending on your account type).
Then, under the ‘Volume’ column, select how many lots you wish to close from your open position. The ‘Closing’ bar will turn yellow, indicating that it is active, and pressing it will result in a partial close of your position. So, click the Close bar, and you’re done.
Finally, you may take a partial profit on MT4 without using any additional software. You do this by opening two trades instead of one and setting different take-profit amounts for each transaction.
If you wish to open a 1.0 lot trade and take 50% of the profit after 25 pips and the rest after 50 pips after your first entry, you may open two trades with 0.5 lots each and set take profits levels as indicated. Thus, take profit1 would be 25 pips, and take profit2 would be 50 pips.
Profit protection is an integral part of forex trading. Knowing how to lock in profit is more crucial to many traders than the trade entry itself. The exit is more significant than the entry since it affects whether or not you make a profit and how much you make.Introduction to forex trading - An industry like no other! — 2023
Successful traders frequently state that they have no set targets or goals for their trading. Instead, they focus on trade management and how to secure effective transactions, maximise profit potential, and minimise risk.
The only way to accomplish this is to use a stop loss and lock in profits. By doing so, you are protecting your account from market volatility and ensuring that you profit on transactions that indicate a profit.
So, how can you know when to stop trading and lock in profits? Here are the solutions:
A potential target is a price level where the price is anticipated to reverse, such as long-term support and resistance. For instance, if the price rejects substantial support and plans a bullish reversal move, you may want to consider locking in a profit while keeping a sell position.
In addition to horizontal support/resistance, price-level methods such as Fibonacci, trendlines, and pivot points can be used to determine specific profit targets.
Maintaining a specific risk-to-reward ratio is an unquestionable component of risk management in forex and stock trading. It is best to lock in the floating profit as soon as your trade generates the predicted return amount relative to your risk.
According to market analysts, the normal risk-to-reward ratio is 1:2. For instance, if your stop-loss budget is set at 50 pips, your profit target should be 100 pips. As a result, even if you lose half of your transactions, you will still be profitable. Considering a significant risk-to-reward ratio is another way to determine whether to lock profits.
When sensitive financial data is released, price movements become completely unexpected. If you have an open position during such news events, the report either favours you or makes matters worse by reaching the stop-loss area.
In financial trading, a partial close means realising a portion of an unrealized profit/loss created by an active order.
The idea of partially closing an order adds flexibility and control to everyday trading. It helps you to control risks in response to changes in market circumstances.
For example, suppose you created a successful buy position because the price is close to reaching your predetermined target. However, the current bullish momentum indicates that the price is likely to exceed your target level and may take part in a more significant bullish move in your favour than anticipated.
As a result, you might elect to close half of your order when the price reaches your initial target and let the other half run to offer your entry a higher profit margin.
Forex risk management is one of the first lessons every trader must learn. Locking the profits while trading currencies is vital as this may save you from potential losses. There is nothing exactly right and wrong in trading, but how we use it makes it so.
So be wise while using the stop loss; neither be so greedy nor be so conservative. Be rational and build the qualities of wallet management.
After the stock reaches the first price target, the trader may lock in profits on one-third of the position while holding the remaining two-thirds until a higher price target is reached.