Friends often ask me, when should I take profit? When should I cut loss? At which position is the effect of cutting loss and taking profit the best? Which strategy has a higher profit?

Taking profit and cutting loss are one of the most important parts of trading. If not handled well, it is very likely to lose everything.

So in the next two weeks, I will share all the best cutting loss and taking profit techniques that I think are available on the market in one go.

I will write it in two articles (otherwise I can't bear it). Both articles will be full of technical dry goods. At the end of the article, I will also talk about the most common problems of cutting loss and taking profit.

You can choose the most suitable, most profitable, and most balanced method according to your own trading strategy.

It is recommended that you can collect it first, then read it. If you feel that you have gained something, you can give the article a thumbs up, thank you.

1. The method of taking profit

Taking profit refers to the situation where you have reached the profit target in the transaction. In order to prevent the market from reversing, you can close the position and put it in the bag.

Taking profit is mainly divided into static taking profit and dynamic taking profit.

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Static taking profit refers to taking profit when the order reaches the preset target position. For example, if the profit expectation is 100 points, and the price has risen by 100 points, you can immediately take profit and close the position. The target position for taking profit is still fixed.Dynamic profit-taking refers to a situation in trading where the target profit level is dynamic, and the trader holds the order until a dynamic criterion is met before closing the position. For instance, when holding a long position with floating profits, one might wait for a breakout in the opposite direction (bearish) before closing the position. While holding the position, it is impossible to know in advance where such a bearish breakout will occur, so the trader must continuously monitor the market dynamics.

Now, let's discuss five methods of profit-taking.

Method 1: Fixed point profit-taking.

This is the simplest form of static profit-taking. It involves setting a fixed profit margin after entering an order, which is more suitable for intraday and short-term trading. For example, after entering an intraday trade, one might set a fixed profit-taking point of 50 points.

Intraday and short-term market movements have a distinct characteristic: the market tends to retrace, and sometimes repeatedly. When the market retraces, the profits from the held position can be given back. Setting a fixed profit point to close the position can be more advantageous in trading, as it helps to avoid the profit erosion during retracements.

Take the 5-minute K-line chart of the rebar contract 2305 as an example.

I randomly selected the recent four days of market movements on the chart and marked them with red arrows. The market experiences significant retracements daily. In such market conditions, fixed point profit-taking is the most beneficial, as it helps to avoid the profit drawdown during retracements.

In practice, one should set the corresponding fixed stop-loss points according to the volatility of different products. For products with high volatility, the points should be set higher, and for those with low volatility, the points should be set lower.

A reminder to everyone: do not underestimate the effectiveness of this method just because it is simple. The usefulness of a method depends on the specific context in which it is used.Method 2: Fixed Profit-to-Loss Ratio Take Profit.

This is a widely used method of static take profit in medium to short-term trading.

First, let's explain what a profit-to-loss ratio is. The ratio of the profit space of an order to the stop-loss space is the profit-to-loss ratio. For example, if the profit is 100 points and the stop-loss is 50 points, the profit-to-loss ratio is 2:1.

Now, let's discuss fixed profit-to-loss ratios. Setting the take profit based on the stop-loss space at a fixed ratio is known as a fixed profit-to-loss ratio.

Suppose a stop-loss for an order is set at 100 points.

- If the take profit is set at 100 points, the profit-to-loss ratio is 1:1.

- If the take profit is set at 150 points, the profit-to-loss ratio is 1.5:1.

- If the take profit is set at 200 points, the profit-to-loss ratio is 2:1, and so on for other profit-to-loss ratios.

Stainless steel contract 2304, 5-minute K-line chart.

- After a breakout at the bottom of the market, a position is opened with a stop-loss set at the previous low, with a stop-loss space of 50 points. When the market moves up by 50 points, the profit-to-loss ratio reaches 1:1. When it moves up by 100 points, the profit-to-loss ratio reaches 2:1. When it moves up by 150 points, the profit-to-loss ratio reaches 3:1.Fixed profit and loss ratio method is simple to operate and highly executable. Moreover, when market fluctuations increase and the stop-loss space expands, the profit-taking space will also expand accordingly, demonstrating great flexibility.

Method 3: Combining technical indicators for profit-taking.

This is also a static method of profit-taking. After entering the market, set the profit-taking target based on the standards of technical indicators. For example, horizontal support and resistance levels at previous highs and lows, support and resistance levels of the upper and lower Bollinger Bands, and support and resistance levels of important moving averages are all viable options.

This is also a 5-minute K-line chart of the stainless steel 2304 contract.

After the market bottom breaks, open a position with the stop-loss set at the previous low. At the 5-minute level, the most obvious resistance is the previous high of 16,350, so set the profit-taking at this level. When the market rises and reaches 16,350, the order is profit-taken.

Additionally, in practical trading, it is common to enter at a smaller time frame and exit based on the support and resistance levels of a larger time frame.

For example, entering at the 5-minute level and looking for the 1-hour support and resistance levels for profit-taking, or entering at the hourly level and choosing the daily Bollinger Bands for profit-taking, is essentially a strategy of thinking big but acting small.

Method 4: Trend-following profit-taking.

This is a dynamic profit-taking model and a trend-based profit-taking strategy.

It refers to holding a position after entering the market, following the trend indicators, and continuing to hold until a reversal signal is given by the trend indicators, at which point the position is closed for profit-taking.The examples in the two charts above are from the same trend, which is the 5-minute K-line chart of the stainless steel 2304 contract. After the formation of a breakout at the bottom of the market, a position is opened with a stop loss set at the previous low. Two moving averages, MA30 and MA50, have been added to the chart. After the order is placed, hold the order until the two moving averages form a reverse crossover at a high level, signaling a reversal, at which point take profit and close the position.

In daily practical combat, using trend lines, channel lines, and tracking market inflection points are all quite common methods.

Method 5: Combine various methods and take profits in batches.

The four methods discussed above are the most mainstream and common, but each has its pros and cons.

For example, the fixed profit-loss ratio method cannot hold onto the profits of a trend, and the trend-following method cannot make profits in a consolidating market. Therefore, some smart traders combine these methods, taking profits in batches.

For instance, after the order is placed, when the profit-loss ratio reaches 1:1, close a portion of the position, and the remaining position is exited using a trend-following method to capture larger profits.

The examples in the three charts above are from the same trend, which is the 5-minute K-line chart of the stainless steel 2304 contract. After the formation of a breakout at the bottom of the market, a position is opened with a stop loss set at the previous low. When the profit reaches the 1:1 profit-loss ratio, close a portion of the position first, and continue to hold the remaining position, tracking the trend, waiting for the moving averages to form a reverse crossover and signaling a reversal to close the position.

The essence of this operation is a compromise in taking profits, allowing one to make some money in a consolidating market and also to make some money in a trending market.In practical application, you can combine the above profit-taking methods in various ways. For example, you can combine the support and resistance levels of previous highs with a fixed profit-loss ratio, or combine the support and resistance levels of previous highs with a trend-following approach.

After discussing these five technical methods for taking profits, it's merely providing a thought process. The specific effectiveness in real trading must be combined with your own trading system for backtesting or simulated trading before entering actual combat.

2. The Three Major Questions about Taking Profits

Question 1: What if the market moves significantly after taking profits?

Don't be troubled; there is never a best point to take profits, and it's impossible to sell at the highest point.

Many people make the mistake of judging the quality of the outcome based on the changes they see at a single point. However, the market is always dynamic. Although it may seem that a significant space has been missed after taking profits, the results may change over time.

Let's illustrate with a simple market movement.

The left, center, and right charts of a five-minute market trend of the same product represent different time points.

On the left, after the market forms a top breakdown, a position is opened, and profits are taken at the horizontal support level below, which is time point 1. The position is closed smoothly, which is a good outcome.Looking again at time point 2, the market quickly retraces to the entry price, and you would be glad that the order was closed at a lower position, making the closure at this point still a good outcome.

As the market continues to move to time point 3, it plummets significantly, far below the closing price at time point 1. Here, taking profits would double your earnings, and you would be regretful again, as this is no longer a good result.

Looking again at time point 4, the market has rebounded sharply, and the previous closure is once again a good outcome.

As time goes on, the market is constantly changing, and the quality of trading results is also constantly changing, with no best point to take profits.

There is no regret medicine in trading; it is meaningless to dwell on the past from the present perspective, and as the saying goes, "a blessing in disguise."

Remember in trading, once you've taken profits, don't look back, and there's no need to create unnecessary worries.

Question 2: What is the best method to take profits?

No one can answer this question for you; you can only ask yourself.

Because everyone's trading strategy is different, you can only try various methods of taking profits and use backtesting to find the profit-taking method with the highest profit point.

You can backtest using different profit-taking methods while keeping other details of the trading system unchanged.For instance, take the price trend of a particular variety over a 5-year period and review it using a fixed number of points, a fixed profit-loss ratio, or a trailing stop method. After you have reviewed 300 instances, compare the profit data from the three different stop-loss methods, and it will become clear which method yields higher profits, it's that simple.

Of course, it's important to note that while pursuing high profits is crucial, the feasibility of the method is equally important. Don't blindly chase after high profits.

When I explained the stop-loss methods earlier, I specifically used the same type of candlestick chart as an example to illustrate that a single entry method can be combined with different stop-loss methods to form a trading system. There is no good or bad in stop-loss methods; it's all about whether they are suitable or not.

Question 3: Can setting a stop-loss quickly provide a better psychological advantage?

Yes. Compared to aiming for a larger profit space, I recommend a moderate stop-loss.

In trading, mindset is paramount. If you focus solely on profit without considering your mindset, it's akin to playing with fire.

The longer you hold a position, the more anxious and uneasy you will feel, leading to self-doubt. Human nature prefers the security of a sure thing, so a quicker stop-loss aligns with human psychology in trading.

This is why I always say, don't set an excessively high profit-loss ratio. The numbers may look good, but you won't be able to execute it.

In trading, the worst thing is to be overly greedy. To truly achieve stable profits, you must strive for balance in all aspects.

In next week's article, I will continue to write about the 5 technical methods of stop-loss, as well as the most common issues in stop-loss. Everyone can refer to them together at that time.