Hello swingstar,
This is a really good question, and one that is actually quite relevant to a range of derivative approaches. Let me just “cut to the chase” and say what I do for directional trades (credit spreads, non-directional trades and volatility plays need different handling), and not deal much with the broader picture and the variables for individuals.
I exit partial positions near forecast points of resistance if net long the underlying, or support if net short the underlying. Generally this is half the position, but can be one third for positions I’m very confident in, or two thirds for positions I determine are more likely to fail. (In complex positions it may mean adjusting the trade - buying back sold positions, or selling bought ones or both).
The remaining position then has a trailing stop loss, or is exited when the drive satisfies a predetermined exit criterion (profit or stop).
I also look to re-enter the trade on a counter trend, or when a trend resumes after a pull back (sometimes just adding the amount of the exited partial position, or sometimes adding more capital to the remaining position than the exited half).
Key concepts are to take profits to defend against apparent moves that fail. The classic result being overstaying a position that was profitable when the underlying moves in your favour initially, but then reverses, and turns into a loss. Something you can avoid with partial positions.
If my position doubles in value, I usually exit half to lock in profit – essentially you can’t lose then, and can sit comfortably letting the winner run.
Also, I look to exit options on strong moves, especially with options that you have bought, and the IV kicks up in your favour. Sometimes the high value for the option is on the day of an exhaustive drive, never to be repeated even if the underlying continues to drift in your direction – time frame is a critical element here.
More broadly though, there are many potential profit taking and stop loss configurations, and a lot of this will depend on each individual. Key variables are:
• Financial goal/chosen market/type of instrument
• Analysis – (style of) Technical, Fundamental, hybrid, alternative
• Strategy – directional, non-directional, volatility, other (e.g. Gamma)
• Risk Tolerance – conservative, aggressive, moderate, etc
• Timeframe - intraday, short term, position trading, mid term, or long term
• System approach – e.g. expected win/loss ratios
• Position Size (you may set percentages of your overall capital for instance)
• Personal preferences
As you can imagine there are a host of possibilities from trading from no set levels (pure discretionary) to complex regimented rules.
Hope this helps!
Regards,
Magdoran