Letting Profits Run
This is a discussion open for comments as I often wonder if anyone has a more mechanical approach or better psychological approach to this issue.
I invite feedback from you.
Chris
The age old question of a trader:
How do I know when to take fast profits and when to let them run?
The majority of trade setups are based on probabilities, not certainties as Threei said earlier. Therefore, the conclusion to this question is not one that is simple and direct. There is no magic formula, no easiest way to describe a technique. Here is why. The methods I use are based upon principles of tape reading. These are derived from probabilities based on price and volume. For the most part, we are watching them in relation to a level 2 view and not off some kind of broader chart. I have a shorter time frame for intuitive feelings. We are able to read things on a shorter time scale. Stocks talk to us for only so long before we lose our relationship with them. Many times you will see our relationship with the stock last longer than normal, sometimes we have no relationship with the stock
at all. In this sense, the trade tells us to enter based on familiar setup. The trade tells us to exit on familiar exit strategies. The conclusion is that many times, we are thankful for exiting our trade strategy, while in hindsight, many times, we wish we threw our rules out the window.
Two perfect examples from this week were VIGN. I scalped near 19 and its high near 21 1/2 . EGRP setup near 10, and traded under 9. What makes VIGN go to 21 1/2 and EGRP to under 9? Same setup, how do I know when to exit EGRP for scalp/take loss or hold it like VIGN for 21 1/2? There is something that goes deeper into this issue than what lies on the surface. It's a psychological make-up which unfortunately is based upon you for any given day.
Here are two examples from personal experience. Tuesday was a very nice day for me, nice rebound after a rough month of basically sustainability for me in November. Stocks were talking to me nicely, market was loosening up a bit making follow through in many stocks worth while. I was able to feel more in tune with how the market was functioning in the last couple weeks. After Tuesday of nice profit, my mood was better, my ego was stepping back in a bit, I could feel it. While it's so important to remain emotionless, it's a constant struggle each day. So I woke up on Wednesday morning, excited for the bell to ring the open. I felt confidence in trading and my ability to listen to stock action.
First trade was ISSI. I made a nice profit on 1/2 shares for 1/2 point, and a full point on remaining shares. I was still in the same zone that started from Monday's trading, heightened Tuesday and carried forward into the Wednesday’s early trade. I was more willing to let this profit run a bit, rather than take the scalp. Was this based on a system of sorts? Yes and no. Yes because I saw very nice volume coming in and a price move that was telling me selling 1/2 and holding 1/2 was okay. Principle of tape reading that took the volume/price spike to 12 tells me to exit remaining shares. My mood, unfortunately my ego and my ability to read were all working together in some fashion that made me not take the 1/4 point, but rather hold the run of the stock. Even after I sold, I still think ISSI continued higher. Why didn't I hold for that run? Who knows, but am I going to question every run that I miss? No, this isn't the point of the discussion.
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