Logic behind ‘closing half of the position’?

[Raza]

I have often read traders saying they closed half their position at X number of pips and move stop loss to BE.. While moving stop loss to BE makes sense, but closing half of the position doesn’t.. I have looked around but didn’t find anything useful that explain how this works..

If I open 1 lot and aim for 100 pips.. and I decide to close half my position at say 20 pips. And the other half at when 100 pip is reached.. Am I not limiting the total gain to just $60 (1$/pip)? Whereas the original gain would have been a full $100 had I not closed half my trade at 20pips..
Clearly decreasing my risk to reward ratio..

I hope I am making sense here.. Its just that I am struggling with keeping pips. Very often my trade goes my way 30-50 pips before reversing and either closing with a few pips, at breakeven or worse at a small loss..
I am trying to figure out a way to preserve the small gains I make and that’s why exploring ‘closing half position’ concept.. so far I have not been able to understand the logic behind it..

I’ll appreciate help from all the experienced traders at babypips..

[PipBandit]

It's a trade-off basically. Assuming that the trade goes your way initially your options are:

Let the full trade run - either you'll hit your target and get the max profit or you'll get stopped out at B/E and make nothing.

Lock in some profit after X pips by closing a % of your open position - that guarantees you some initial profit and then a reduced amount if the trade goes all the way to the target. However if price reverses and comes back to B/E then at least you've still made some profit from the trade.

Leaving a small bit open after you hit your target can also be an option too in case price decides that it wants to keep on going.

[Cyco]

I mainly trade a daily chart, but look at the weekly Stochastic chart for cross overs.

This is a sign that a trade is often running out of steam, and so I will generally close half on this, hoping to get maximum gain before the trade comes back to where my stop is positioned. This is not an exact science, so sometimes this signal will not happen till after I have taken another indicator to leave it totally.

[RainMan]

Great question. I think closing part of a position doesn't make logical sense for the reasons you gave. It limits your potential profit on that trade.

I think it's done for emotional reasons. It's what traders do when they don't feel confident in their position, and they don't want to feel bad if price turns around and they lose. Close half the position so no matter what, you can feel like you've won at least a little.

But really, if you don't know what your doing in the trade, keeping half the position open is like throwing the dice and seeing what happens. I think you should decide if you want to be in the trade or not based on your best judgement of the market at that moment, and get out or stay in. If you decide there is a good chance that price is going to make a big move the wrong way, get out completely, or trail your stop.

I zoom in to a smaller time frame, and put my stop right under the nearest little support.

That said, lots of traders close part of their positions. I've seen Steve Nison encouraging that. But lots of traders think it's a bad idea. I think Nial Fuller really hates it. Maybe as I get more experience, I'll change my point of view on this.

Bottom line, do whatever gets the most profit with your trading style.

[RainMan]

Actually, I just had an inner debate with myself about this. Now I'm not so sure.

Sometimes I open 2 trades at the same time, and close them at different times. Basically, that's the same as closing part of my position, then keeping the other part open. I do that, for example, when I want to go long looking at the H4 chart, and I also want a long trade on the D1 chart. So I open a long term trade and a short term trade at the same time.

The only difference is I usually have different stop loss levels, depending on the TF of each trade.

I'll have to think about the logic behind this.

[kwyjibo]

I shorted NZD/USD at 0.7900 on Tuesday, it reached 90 pips, then I moved my SL to break even. Price reversed and hit the BE on Wednesday.

If I had taken 1/2 profits at 90 pips, I would have some profits. Instead I have nothing. Could have been worse though, I could have not implemented a break even and made a loss.

[SoundOfLight]

I shorted NZD/USD at 0.7900 on Tuesday, it reached 90 pips, then I moved my SL to break even. Price reversed and hit the BE on Wednesday.

If I had taken 1/2 profits at 90 pips, I would have some profits. Instead I have nothing. Could have been worse though, I could have not implemented a break even and made a loss.

THIS is precisely why i (a) don't have hard TP targets, and (b) exit a trade when it starts moving against me by N pips. trailing stops, basically, on the full position. i can't for the life of me fathom allowing the market to keep moving against me THAT far and not act. leaving money on the table.... ouch.

[Master Tang]

I used to do the whole "close half" thing religiously.

What I do now is, if my position moves in my favor, my stop drags up to a point that is worth what closing half would have been, but remains fully open.

So, example. If I had a long position on the euro that was opened at 1.2500, and my first thoughts were to close out half at 1.2550, I would instead leave the full position open, and move my stop to 1.2525. I've now locked in half my value, minus slippage of course, but I've left it open for max gains.

[Raza]

I used to do the whole "close half" thing religiously.

What I do now is, if my position moves in my favor, my stop drags up to a point that is worth what closing half would have been, but remains fully open.

So, example. If I had a long position on the euro that was opened at 1.2500, and my first thoughts were to close out half at 1.2550, I would instead leave the full position open, and move my stop to 1.2525. I've now locked in half my value, minus slippage of course, but I've left it open for max gains.

This seems like a better idea.. but on the downside are we not now giving our trade less breathing area? I say this because we generally see quite a few retracements before the 100pip target is reached and the closer we move our stop loss, the probability of it hitting increases..

At the end, what we are really doing is completely altering the system’s rules.. and hence all the back testing and previous live trading record is of little use..

The system I trade thrives on catching big moves.. a few 100 pips trades a month enables me to end the month positively. And prior to now I have been able to do this without much alteration (by keeping it simple).. Its only now that I am looking to optimize the system..

More words of wisdom will be appreciated

[luiz]

They said "You can't go broke taking profit" and "Let the winner run".