The Art of Trend Trading by Michael Parness

Author:Michael Parness
Language: eng
Format: epub, pdf
ISBN: 9781119185321
Publisher: Wiley
Published: 2015-11-23T00:00:00+00:00

Know When to Hold ‘Em or Fold ‘Em

Equally as important as managing risk on a trade is planning how you will take profits. You've likely heard the common adages that apply to this topic: “Bulls make money; bears make money; pigs get slaughtered,” and, “No one ever went broke taking profits!” If you get greedy and wait too long to take profits, you risk giving back your gains, and even worse, you risk turning a winning trade into a losing trade. Once again, this is such an important aspect of trading that in addition to discussing it here I will occasionally provide suggestions and reminders about it at other appropriate times.

As mentioned in the preceding section, taking profits is in a sense having a preplanned exit strategy for your trade. In this case, you might think of it as an exit strategy for what happens when a trade moves in your favor. I'll discuss a general approach that I frequently use for taking profits here. Chapter 10 provides other methods of planning specific entry and exit price targets that are based on technical analysis. Of course, there are many potential variations for when and how to take profits. As always, you should take the specific circumstances of a trade into consideration as well. Many traders set hard-and-fast price targets for taking profits, and then when their price targets are hit, they close out their positions entirely. Depending on the circumstances, I may occasionally do this as well, but generally, I prefer to lock in profits a piece at a time as I achieve any significant gains. For example, suppose I buy 1,000 shares of a stock at $50 a share. If the price breaks $50.50 (the specific amount depends on the situation), I might sell half of my shares, or 500 shares in this case, and then move my stop-loss setting to break even on my remaining 500 shares, or to $50.06 in this case, allowing for commissions. This not only locks in a portion of my gains, it ensures that I can no longer lose on the trade. In other words, it ensures that a winning trade will not turn into a losing trade, which is a key rule you should strive to enforce. Ideally, you should never allow a winner to turn into a loser.

Extending the preceding example further, there are a couple of ways that I might finish out the trade, depending on how I feel about the strength of a particular trade. If I achieve additional gains but the move appears to be running out of steam, I may just take profits and close out my position entirely at that point. Alternatively, if I achieve substantial additional gains and it appears there could still be more upside movement in the play, I may once again sell half of my remaining shares and continue to trail the move with a stop-loss order, possibly tightening my stop-loss setting. At this point, I will frequently just continue trailing the

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