Definition of profit-taking’
Lock in profits relates to the implementation of previously unrealized income accrued at the sale of all or part of the assets. When an investor holds the open position, they can occur non-operating income or paper or losses that are not realized until the position is closed out. These gains were locked in when the investor sells his share, as they are not subject to change.
Also known as “implementation” or “taking money off the table”.
Breaking the ‘lock in profits’
Traders and investors can take profits for many different reasons, but often, this reduces the risk.
Long-term investors can take profits to maintain their portfolio balance. For example, the investor can begin with a portfolio divided equally between the five means. If one wins, his portfolio can grow from 20 to 30 percent provides the investor additional risk. The investor can lock in a profit part of the Fund ahead of redistribution of income among the other four funds to maintain the ideal distribution of a portfolio that minimizes risk and maximizes the profit.
Short-term traders often take profits with the aim of generating income and reducing risk. For example, a trader can open a long position after a bullish earnings announcement with a series of price points. After the stock reached the target price, the trader can take profits on one-third position and continue to hold the other two-thirds of the position is above the target price. Thus, the trader takes money off the table and reduce their risk if the stock suddenly declined.
The trader sets the price targets for taking profit with the use of various forms of technical analysis such as technical indicators or graphic patterns, while long-term investors can take profits based on the asset allocation or risk tolerance.
An example lock in profit
Suppose you buy 100 shares of Acme co. for $12, the price rose to $36 two days later. All potential revenues unrealized because the position isn’t partially or fully closed. If stock moves down, your profit will decrease and Vice versa if it goes above. You may decide to take profits by selling 50 shares because 50 x 36 $ = $1,800. If the stock drops to $1, you will still make a profit. In other words, the profits were given the opportunity to “play with house money” on investments.