A personal history of selling strategies - 2
Recent Enhancements Bring Some Success
7. For awhile, I tried selling covered calls and buying puts to lock in profits. The covered calls did generate some income, but, since I trade aggressive stocks and believe that future prices are not normally distributed and have heavy tails, I don't believe I'm properly compensated for the upside I give up. Commission costs and spreads also take a great deal out of options profits. Over time, I concluded that if I think about an options strategy, rather than complicate my positions, I'm better off just selling the underlying.
8. Like many here have, I rode the bubble up with profits that far exceeded even my wildest imagination. Of course, I followed my stocks back down too, trying to switch to fresher horses while economists debated whether this would be a V-shaped recession or U-shaped. I guess L-shaped wasn't considered to be an option. When the abacus totalled all my losses, I walked away from trading for several months and when I came back, I had a new set of selling guidelines. I also moved away from a day trading focus to an emphasis on swing trading. The first thing I did was immerse myself in TA and gain more knowledge about resistance levels. When I traded, I used "mental stops" -- stop losses that were not entered into my account (like Martha Stewart, I guess), but provided strict rules as to when I should get out. These utilized basic chart analysis of accumulation areas and (my sense of psychological support around) round numbers and did not take into things like moving averages, money flow and various oscillating tools. I followed these and they worked. When I failed to act on these mental stops, it seemed like 80% or more of this time I regretted standing pat. Still, I didn't have the nerve to turn mental stops into automated stop loss orders...
9. While this thread is mostly about taking profits, my thoughts on cutting losses play a large role in my thoughts about profit taking. About a year or so I finally started to enter stop loss orders for new positions. These were tight stops, often around 10%, and provided a nice safety net for new trading positions. In most cases, they saved me money. In those cases where they limited upside, I had enough success finding other winners I was more comfortable with that I wasn't bothered by lost opportunities. This success with cutting losses emboldened me to start entering trailing stops, which I am now doing on a selective basis. On balance, these trailing stops seem to be excellent at protecting profits, particularly on charts where this is sudden breakout.
10. Another recent enhancement to my selling strategy that appears to have been quite profitable has been a more strict relative performance monitoring. I now make an effort to evaluate performance against sector indices, a basket of comparable peers, or even a single comparable stock. In this manner, I've become less concerned about absolute performance as long as relative performance holds up. I could take this analysis out to broader sector rotation, but generally prefer to rely on relative performance within a sector and internal support as my guidelines. The question then becomes one of how long am I willing to put up with performance below a sector basket. This will vary depending upon how long your typical holding period is. Mine tends to be 5-10 days, with some stocks being held over the course of months.
11. One area I have struggled with is Fibonacci retracements. I'm willing to let a stock consolidate gains and drift slowly down on low volume, but how far? I have hard and fast rules that no gain should ever turn into a loss and no large gain should ever give back more than 50%. I'd rather move on to another good idea than to hope that a "correction" ends at a 62% retracement, then moves back up.
12. Bottom line: what works for me is to take profits (usuall sell entire position, sometimes scale out, e.g., when stock becomes >15%of portfolio)...
(1) when strong performance relative to a sector deteriorates;
(2) when key internal resistance points are violated;
(3) when stocks struggle to hold above round numbers;
(4) when any recent strong upward move is retraced by 50% (or sometimes less)
(5) when a stock exceeds 15% of my portfolio
P.S. Though my recent performance has been very strong, even if I had not noticed an improvement in the numbers, I would be pleased that I worry less about when to take profits, sleep better, and act more decisively according to agreed upon principles of when to hold and when to sell. Still, the easy part is coming up with guidelines; the hard part is to adopt the discipline to follow them 100% of the time. |
