Profit Management - The Secret to Making Money Consistently

Most traders know how to trade. They have all the technical tools and knowledge at their disposal. They have a profitable trading system. They are diligent enough to do their homework to select trades that meet their criteria. So they should be making money on most of their trades, right? But truth be told, most traders are still not able to make money despite getting their trades right. Why?

Two fundamental reasons :

1. Most traders do not understand the concept of risk - Traders think that their risk is limited to the Maximum Loss for each trade, if the trade hits Stop Loss, apart from the costs of trading such as slippage, brokerage, fees and taxes. That is not true. If the trade moves in your favor, then their RISK INCLUDES THE AMOUNT OF UNREALIZED PROFITS. Hence sound Risk Management should include a strategy to protect unrealized profits as well. We call it Profit Management.
   

2. Most traders are greedy - Once the trade moves in their favour, traders become too complacent to take profits and get out while the going is good. Greed takes over and traders wants to squeeze the last rupee of profit from the trade. The market then turns, wipe out all profits and worse, turns a winning trade into a losing one. Sounds familiar?
   

Our Profit Management Strategy involves trading with a minimum of 3 lots - with different profit targets. The target for the first lot is low enough to cover costs and take some profit home. The target for second lot is to take profits home if there is a modest run in the market and the third lot does not have a target. It is carried till EOD to reap the benefits of a trending price move, a home run. The SL on the 3rd lot is moved to breakeven once the profit on the first 2 lots is booked.

The table below provides the profit targets on the first and second lot by commodity, arrived at through extensive backtesting similar to SL in the previous post.

(Table 1.1 - Profit Target by Lot by Commodity)

This strategy to manage profits so that you PAY YOURSELF for your efforts is central to making money consistently in the market. The trading courses, books and videos on technical analysis teach you HOW TO TRADE but they do not teach you HOW TO MAKE MONEY WHILE TRADING. This is of the MOST IMPORTANT concepts you can learn if you want to make consistent money out of the business of trading.

With this, we have concluded the discussion of Risk, Money and Profit Management. Please click on "Next Post" to know about time tested trading rules that complement the discussion on strategy - Trading Rules.

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