Profit Taking: Getting Out While You Are Ahead
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One of main features of day trading is profit taking. Today, profit taking is a major reason that the Dow is slumping in a direction that could very well take it back below the 10,000 mark. In profit taking, the goal is to get out when you have profits. In most cases, these profits are not necessarily large. They are often small, as investors take what they make to avoid the chance of loss later on. (The opposite of this is running profits, in which you try to keep going in the hopes that your profits will get bigger and bigger, attempting to sell just before the investment turns around.)
Profit taking is a strategy that can be used with most investments. Day traders use it with stocks, and it is a very popular technique for active forex traders. Some commodities and futures traders use profit taking as well. Profit taking is a way to ensure that your losses are limited, since you get out as soon as a position is profitable for you, whether than waiting to see whether things get better. You end up with a lot of small profits, rather than one huge payoff. On the other hand, you are less likely to sustain large losses, which is a very definite risk of running profits.
It is important to be careful when you use profit taking as an integral part of your investment strategy. Every time you place a trade, you end up having to pay some sort of a transaction fee. And, of course, the taxes on short term capital gains is larger than the taxes you pay on long term capital gains. So if you are not careful, your profits can be eaten away by taxes and fees.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.



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