Let profits run and limit losses: That’s how it works!

The reason for not rushing to take profits on trading positions that are moving in the desired direction is due to the fact that markets move in trends. The goal of a trend-following investor should therefore be to accompany as much of this trend movement as possible with the position taken in order to maximize profit. Accordingly, large profits can only be achieved if the position is left with enough room for typical counter-movements against the dominant trend and sufficient time to run into profit so far that the chance-risk ratio targeted when taking the position relationship can actually be realized in the sense of taking advantage of opportunities. If, as experience has shown, investors tend to regularly take profits too early, only partially realizing price gains can represent a sensible psychological countermeasure. Such partial profit-taking of around half the position could occur, for example, in the uptrend at key technical resistances as well as overbought market technical indicators. Experienced investors who realize partial profits usually require as an additional requirement that the position must have moved in the desired direction by at least 1R, i.e. the simple price distance to the set initial stop-loss level (risk). The usually associated trailing of the protective stop of the residual position to at least the level of the entry price makes the residual position, barring the possibility of a gap or other sharp countermove, one that is “out of the fire”. So that there is an acceptable chance-risk ratio in relation to the overall position, a possible profit realization for the remaining position should only be considered from about 3R at the earliest. Something else applies, of course, if a trend reversal is evident beforehand.

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