This post will help you calculate when to close a position at a profit.

Determine the costs of trading

You need to count what costs you have for opening and closing a position.

These costs are:

• spread
• commission for opening, closing a position
• swap if you hold the open position overnight
• taxes

These values will vary depending on where you trade from, on what instruments.

For example, you can trade from Dubai, pay no taxes, trade only on index futures where the cost is the spread.

Another trader may trade from the UK, for example, where there are capital gains taxes, and trade on Forex with broker who has a commission for opening and closing a position.

Minimum profit

Now you can calculate the minimum value of the profit you are interested in.

In my opinion, the sum of the above costs should be a maximum of 20-25% of the value of a average profitable position.

For example, if your costs are $4 for one lot then you should build such a system that will allow you to close positions with a average profit of $18-20.

What to watch out for

There are several things you should keep in mind and take into account in addition.

The most important of these is, of course, loss positions. You will not be closing positions only with a profit but also with a loss.

You certainly need to determine what average loss you accept.

It will be much easier to build a suitable investment strategy with a good risk to reward defined from the start.

The next thing is to compare the average loss positions with the profitable ones, taking into account the effectiveness of your strategy.

Above I have shown how you can calculate the minimum costs and then calculate it so that they represent a maximum of 20-25% of the cost of a profitable transaction.

For this, however to work, you must include the effectiveness of your strategy.

Backtesting for help

If you have doubts when setting take profit or stop loss levels then backtesting your strategy will be most effective way to go.

Many platforms allow you to specify the cost of trading like commission or spread during backtesting.

Even if there is no such option, because you do backtesting manually, at the end you can easily multiply the number of trades times the estimated costs of commissions and spreads and subtract them from the final result.

With the help of backtesting you will also check the effectiveness of your strategy.

This will give you valuable hints.

You will know if you can target a smaller take profit target because you have a high efficiency and even with the costs subtracted you will be in the profit.

Or maybe you’ll find that the efficiency is a little lower but the strategy still works and you just need to target slightly larger moves.

In conclusion

Determining the amount of profit you should take is not that difficult.

It depends on many different factors, but as you get to know the instrument on which you trade at least to a basic degree, and as you pay attention to the costs of trading and the effectiveness of your strategy, it will become easier and easier to choose the most optimal take profit size.