Partial Close – Technique for Preserving Forex Profits

Partial close is one of the forex exit strategies that are available at the disposal of forex traders. Partial close is a forex exit strategy that a trader can use to exit his trade in a piecemeal fashion instead of just exiting the trade at one time. It is used to close a portion of a trade as the profits start to roll in so as to secure some level of profit no matter what could happen later. Partial close helps ensure, at least, small amount of profit when trading is favorable.

The Problem with Partial Close

There is, however, a big downside to partial close is that there is no balance between risk and reward. The risk that a trader decides to take up when a trade is opened is seldom the same as the profit that could be realized. As vital as partial close is, it could also affect a trader’s profit in a negative manner.

Partial Close Example

An example would be helpful in demonstrating here. Imagine a case where a trader, utilizing a 40 pip stop loss, he would then have risk 40 pips as his total amount risk for that single trade. Let us now say that the he decides to perform partial close when his trades are in 20 pips profit.

If the trader decides to partial close fifty percent of his trading positions, he would have, thus, covered 20 pips out of the 40 pips risk. To maintain a 1:1 risk-reward ratio, the trader would have to close out the remaining positions at a higher profit level than 40 pips due to the fact that the remaining positions are traded with a lower contracts sizes.

The problem that partial close could give rise to is sometimes aggravated by the actions of trader. There are some traders that do shift their stop loss to break even immediately after they have used partial close to secure some profits.

The implication of this, based on the earlier example, is that they have put 40 pips at stake in any single trade to gain 20 pips should the remaining position close out at break even. Not only that, should the next trade stop out for the total initial 40 pips, it then means they have to make up for another 20 pips in the trade that comes after, that is, if the trader continues to trade on the same amount of contract size.

Partial Close Protect Profits Reduce Rewards

The fact that there is a disparity between risk and reward indicates that the trader who uses partial close must record a greater success rate relative to another trader that does not use partial close at all. This is because a single loss is capable of reversing whatever profits a trader has realized. The discrepancy in the risk-reward ratio requires a forex trader who uses partial close to record large number of winnings. Else, it would be better for the trader not to use partial close technique at all.