When I started trading, I was excited to find various entry strategies online, such as candlestick patterns. While I could identify good trading opportunities, I didn’t know how to determine the right price to close the trade if it went in my favor.
In my quest to find the perfect take profit strategy, I tried several approaches:
- Setting take profit based on desired profit: I would enter a trade and adjust my take profit price and leverage to match an arbitrary amount (e.g., $30). Unfortunately, the market would often reverse before hitting my take profit price, resulting in losses.
- Using a fixed take profit price: I tried using a fixed take profit price of 20 to 30 pips, locking in small profits when the market moved in my favor. Over the long term, however, these small profits weren’t enough to cover my past losses.
- Trading with support and resistance levels: I placed my take profit price just before the next resistance level (or support level, if selling). While this approach seemed promising, the market often reversed just before reaching the resistance level, leaving me with more losses.
- Partial profits: I moved my stop loss price close to the break-even point when the market started moving in my favor. However, the price would often reverse back to the entry point, hitting me at break-even and then moving to profitable levels without me being in the trade.
Discovering the Risk-Based Take Profit Formula
Frustrated with my inability to lock in profits, I finally discovered a better way of determining the optimal take profit price: the risk-based take profit formula. This formula involves determining your take profit price based on a multiple of your stop loss distance.
To use this approach, first determine your stop loss price. Then, calculate the stop loss distance (the difference between the entry price and the stop loss price). Multiply the stop loss distance by a multiple (I recommend using 2) and add (or subtract, if selling) the result to your entry price to find your take profit price.
Example: Let’s say I buy gold at $1950 and set a stop loss at $1900. The stop loss distance is $50. I multiply this by 2, resulting in a take profit distance of $100. My take profit price would be $2050.
Why the Risk-Based Formula Works
Using a multiple of 2 for your take profit price provides a good balance between profitability and likelihood of hitting the target. A multiple of 1 is not enough to cover past losses, and a multiple of 3 or more often results in the take profit price not being hit.
By consistently using the risk-based take profit formula, I finally became a profitable trader. However, trading success involves more than just finding the right take profit strategy.
Additional Training Mentioned in the video
How to Use Stop Losses for Better Trading Results
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