Profit-Taking

Profit-taking means closing all or part of a profitable position in order to turn a paper profit into a realised gain. The term describes both a decision made by individual traders and a phenomenon that can be observed across the market.

Profit-taking in the market

After a long and strong move, profit-taking often follows, as traders who are already invested begin to realise part of their gains. In a rising market, this means selling – which adds supply and can push prices down. This is one of the reasons why a correction often sets in after a strong move. In a falling market, the same happens the other way round: traders with short positions buy back to lock in their gains, which can lead to a temporary rebound.

The media also frequently refer to profit-taking when prices fall or correct without any news or reports to explain the move.

Example

A share rises from $80 to $100 within a few weeks, and many buyers are now sitting on considerable paper profits. When the rally loses momentum, some of them sell to secure their gains, and the price falls back to $94 – before the trend possibly resumes.

Why it matters for traders

For individual traders, profit-taking is an essential part of every trade: a profit only counts once it has been realised by closing the position. Many traders plan their exit in advance, for example with a take-profit order at the price target or by taking partial profits in stages – which can also help to secure the remaining position. Taking profits too early, on the other hand, can mean missing out on a large part of a trend.