Selling Into Strength: Going against what feels good is profitable

It’s hard enough making a decent profit on a position. And now we’ve got to sell it?

That’s the question – really, the physical agony – that plagues short-term traders. After do all of your due-diligence finding a good setup, sizing-up the risk, buying it, and then watching it take off (hopefully to the moon) the LAST thing you want to do is sell some.

But for swing and position traders, consistent profit-taking rules are critical to making consistent profits. “It’s all monopoly money until you cash out,” is something my girlfriend likes to say when I tell her I’m doing well. She knows (and cares) little about the actual market, but this money management perspective couldn’t be closer to the truth.

You need a strategy for locking in gains. And the discipline to repeat it each time.

Our rules at TraderLion are quite simple:

For swing trades:

  • Sell 1/3 of initial position if 5% profit is hit the same day
  • Sell ½ of initial position if 5% profit is hit any day after the initial buy.

For position trades:

  • Sell 1/3 of initial position if 10% profit is hit, no matter the day.

These rules may sound arbitrary (why 5%? why not 6% or 6.5%?). But the point isn’t to predict the highest stock price or when the market might pullback. The point is to incorporate (really internalize) a method for booking profit.

As you become more sophisticated, you wish to incorporate other profit-taking rules, for example, taking profit when your reward (percent profit) equals your initial risk – the risk equals reward strategy. Or, additionally, when your profit target is reached some multiple of your initial risk – the R multiple strategy.

Successful trading is not a predictive science. It’s a disciplined science.

The unfortunate outcome of NOT taking profit is all too familiar. A winning trade can quickly lose all unrealized profit, or worse, become a net unrealized loss. This is – in our opinion – a technical trading error and must be corrected.

SWAV is a great example of this error. We entered SWAV at $60 on August 7th with a stop at $56. It reached nearly 14% in two days, then hit the stop the following day on August 9th. Unfortunately, we did not exercise our plan to take profits when we had them, and as a result, we took a full loss on the entire position for 6.6%.

The market is difficult enough to navigate. Don’t let avoidable mistakes like this happen to you. Define your profit-taking rules, and follow them religiously.

Remember, it’s just monopoly money until you sell.

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October 12, 2019

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