Mastering the Art of Profit Taking: 5 Key Strategies to Optimize Your Trades

Jack Tacher
Jack Tacher

Jack has been actively trading equity markets for over 15 years. He is a risk first oriented trader that tries to capture the essence of the trend. He mentors new traders to help them shorten the learning curve and understand market dynamics. He is married with two daughters and in his off time he is a black belt in Brazilian Jiu Jitsu and trains regularly.

January 16, 2025
8 min read
767 views

You can sell into strength or you can sell into weakness. I find so many people talking about setups and where to buy, but few people talk about how to sell. The first consideration when creating your sell rules is knowing your time frame. A position trader will use different tactics and techniques than a swing trader or day trader.

The second consideration is understanding the type of market we have. A bullish time in the market and we might not be as aggressive selling into strength, whereas during a bearish time we might choose to take profits faster. Being able to alter our profit taking based on market conditions has the potential to increase profitability and outperform the general market.

How to Use Risk Multiples for Strategic Profit Taking

Risk multiples, also called R-multiples, are a way to measure how much money you make or lose compared to how much you were willing to risk when you started trading. If we think about trading in terms of Risk “R” then our stop loss would be -1R. Profit targets would then be multiples of R.

To put this in numerical terms, if I risk a dollar on a trade (-1R), I would try to make multiples of that risk on the profit side (3R or greater). Why is this important? We know in trading we will be right in the trade around 50% of the time, so by taking trades that may offer a 3R risk multiple or better, we increase our chance of moving our equity curves higher.

By thinking in terms of R rather than specific dollar amounts, traders can reduce emotional attachment to money. This can lead to more objective decision making and less psychological pressure, which could lead to better trading outcomes.

You buy a stock at $50 with a stop-loss at $48.
Risk (R) = $50 – $48 = $2
You sell at $60
Profit = $60 – $50 = $10
R-Multiple = $10 / $2 = 5R

In this scenario we had a 1R:5R. We risked one dollar to make 5, we could be wrong four times and still make a profit.

Key Points:

  • Can be used in any market conditions, including choppy markets
  • Short to Medium Term Time Frame
  • The goal is to make a quick profit target and exit the trade

Using Moving Averages to Capture Extended Profits

If we agree that prices trend, then moving averages are just a visual way of expressing that trend. This is where knowing your time frame is very important. I consider the 10 day Simple Moving Average (SMA) as very short term, 20 day SMA for short term, 50 day SMA for medium term, and 200 day SMA for long term trading time frames.

For this example, we will use the 50 day simple moving average because of how popular it is. During bullish times in the market, using this method will help keep you in a name trending higher. The moving average helps you avoid stopping too early because of small price changes.

A good example of this is NVDA in 2024. We can see that once the uptrend started, this method kept you in the trade for the majority of the move. Using this method, you will always give back a little bit when the run is over, but you will likely stay in the trend much longer.

Symbol: NVDA
Year:
2024

Profit Taking

This example is with the 50 day SMA, but the moving average should be chosen based on the individual traders time frame and risk tolerance. The moving average is a safety net that adjusts higher as price moves.

Key Points:

  • Bullish Time in the markets
  • Medium Term Time Frame
  • The goal is to stay in market leading name as long as possible

Fibonacci Extensions: Identifying High-Potential Profit Taking Targets

Fibonacci (fibs) extensions are like magic lines on a chart that help us guess where prices might go in the future. They’re based on special numbers that appear in nature, like the way flowers grow or seashells spiral.

Profit Taking

I like to start my fibonacci level at the top of a base and end it at the bottom. Fibonnacii gives us areas of interest but are not hard sell areas. Fibonacci extensions use special ratios (like 161.8%, 261.8%) to project where prices might go beyond the initial price swing.

Fibonacci extensions can be applied to various timeframes, allowing traders to identify important price levels across different time frames. Extension levels can act as potential support or resistance areas where price might pause, reverse, or consolidate. This is where trader discretion takes over.

Sticking with the same NVDA chart (weekly), I put fibs at the top and bottom of the 2022 base. There is some discretion at the top of the base, but not much at the bottom. You can see a solid take profit area at the 2.618 extension . Now depending on your time frame and conviction in the name, the 1.618 and the 2.0 extension areas could have taken profit areas as well. If this name continues higher then the 3.618 area could be the next target. The Bigger the base, the better Fibonacci works in my opinion.

Symbol: NVDA
Year:
2024

Profit Taking

Key Points:

  • Bullish or Bearish Time in the markets; can be used for shorting by inverting the fibs
  • Any Time Frame
  • The goal is to hit a profit target

Measured Moves: Pinpointing Exit Points for Maximum Gains

Measured moves need a well defined base such as a double bottom or cup handle. First we measure the bottom of the base to the top which gives us an expectation of how far the move could run. We then measure from the top of the base to the potential extension.

The case study is AAPL with a well defined double bottom. It measures about 35 points from bottom to top. When we measure it out on the extension from the top of the base, it gives us a very good profit taking area before the name goes through a consolidation again.

Symbol: AAPL
Year:
2024

Profit Taking

The Fibonacci 2.0 area is another way to visually see a measured move without doing calculations:

Symbol: AAPL
Year:
2024

Profit Taking

Key Points:

  • Works best in the direction of the trend
  • Works on all time frames
  • The goal is to hit a profit target and take profits

Prior Support and Resistance: Key Levels for Optimized Profit Taking Exits

Resistance areas are where sellers have shown up in the past and are likely to show up again. Another name for this is an area of market supply. By identifying resistance areas, a trader can use price levels to scale out of trades and take profits. These usually occur after a nice run in the stock and the equity needs time to rest and retrace.

Many times with this strategy we are selling the stock to late comers who are buying at the exact wrong time. Looking at the AAPL double bottom, we see resistance get established around 198 (purple horizontal area) the name retraces and then comes right back up to that level. The stock then retraces again to form the second double bottom base to eventually breakout.

We want to be selling, at least partially, into that over head supply. If/when a stock breaks out it always can be bought back to create a new trade. Remember, prior resistance now becomes support.

Symbol: AAPL
Year:
2024

Profit Taking

Key Points:

  • Works best in the direction of the trend
  • Works on all time frames
  • The goal is to take profits at predefined areas of supply.

Final Thoughts

This is a brief overview of profit taking tactics. Some considerations when choosing which to use are your timeframe, risk tolerance, and market conditions.

Many people agonize over this part of trading because they are afraid of missing out (FOMO) on an even bigger move. No one says you have to sell your entire position at the target you determined. Always consider partial profits along the way to help your trading psychology (booking partial profits will release dopamine) and to also help your equity curve go from the bottom right to the top left of your screen.

Some of these methods can be combined as well. For example, you could sell a partial if a Fibonacci extension or risk multiple is achieved and then use a moving average for the second part of the trade.

It’s important to be comfortable with your trade once you sell. The stock might continue going up, or it might crash after you exit. Whatever happens, it is not your problem. You executed your trade, managed risk, and took profits based on your system. Once you sell, that stock is someone else’s problem. That mindset is essential to being a profitable trader.

Frequently asked questions

Many traders focus on buying setups but struggle with selling. A solid profit taking strategy helps lock in gains, manage risk, and avoid emotional decision-making. Without a plan, traders often sell too early out of fear or too late due to greed.

Moving averages act as dynamic support levels, helping traders stay in winning trades longer. For medium-term traders, the 50-day simple moving average (SMA) is a popular choice. It allows you to ride trends while avoiding premature exits due to short-term price fluctuations.

Prior resistance levels often act as barriers where sellers step in. Taking profits at these levels prevents holding through potential pullbacks. If a stock breaks resistance, it can always be rebought for a new trade.

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