When your trade is going well, when do you get out? How do you know it’s time to book that profit?
The answer depends upon the type of trade that you’re involved in.
I categorize trades into two groups: with the trend or against it.
Watch the video or read on below.
An uptrend is a pattern of higher highs and higher lows, while a downtrend is a pattern of lower highs and lower lows.
If a stock or index is in an uptrend and I’m long, I would be with the trend.
If that name is trading down and I’m buying it, that would be a counter trend trade.
I have a different plan for each trade when it comes to exiting for-profit.
One of the key things to remember about trends in the marketplace is they tend to last longer than anyone expects.
It’s a great rule to assume that whatever trend you’re looking at will last forever, until it shows you that it’s changing.
When taking a trade that is with the trend on the upside, my reward is theoretically unlimited, as the S&P 500 has trended higher over the course of its entire history.
When taking a trade that is with the trend on the downside, the maximum possible reward is just 100%, which would mean that stock goes to $0.00.
When you’re with the trend, look for continuation chart patterns such as bull flags and bull pennants, with all of your moving averages (short and long term) sloped upward in the same direction as the trend.
Trailing your stop when you’re with the trend, based on the pivots of higher highs and higher lows, can help you maximize your reward.
If I’m against the trend, I often exit on the way up.
When I’m looking for a retracement higher to certain points, I like to utilize an 8 and 21 EMA (exponential moving average) to show me technical equilibrium for any stock or market that I’m looking at.
If I’m going counter trend and I get a bounce back to the space between the 8 and 21 EMA, that’s usually a great spot for me to book the majority of my position for a profit.
Then, maybe I’ll hold a smaller percentage of it — 10 to 25% of my original core holding of that counter trend trade — just in case that retracement actually becomes a reversal.
I don’t always want to completely exit out of a position when it’s going in my favor.
Rather I’d want to maximize my reward by implementing a trailing stop system for a percentage of my core position.
A trailing stop system will allow me to slowly raise my stop, locking in more profits over time. Eventually, when that trend does change, I’ll get stopped out of the position for a win.
Ideally, you want to give the name as much breathing room as possible to maximize reward, but always keep the proper stops in place.
That’s how you can get the unlimited reward I’m always telling my team to focus on with their trading!
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– Derrick Oldensmith
Senior Trader and Managing Supervisor