Locking In Profits
Have you ever been in a position where you purchased a stock, and rode it all the way up before the stock came crashing down before your very eyes only to say to yourself, ‘It’s alright, I’ll sell out my position on the bounce back up and realize a smaller profit’…and it never happened, resulting in a lower profit or at breaking even, or even worse, suffering a loss?
Does that situation sound all too familiar, perhaps happening too often? Yes, you may have in fact timed your entry perfectly and picked ‘the bottom’ but you failed to take profit and lock in the gains you could have made.
One of the most difficult steps in trading is to find a good entry and exit point. It is definitely not easy to do, and those traders who can do this will be finely rewarded.
There are traders who are better at entering a trade but worse at exiting a trade and vice versa. It is your responsibility to define your weaknesses and work on improving them.
However, to become a successful trader, you have to learn to take profits based on for example, pure technical analysis key resistance points or moving average crossovers as a reference for an exit price.
It is important to set a specific price target and make sure you stick with it. However, it does take courage to execute taking profits at the target price. Remember, once the profit is locked in, it cannot be taken away from you.
Sometimes greed is not good
Let’s take for example a situation where you purchased a stock on a breakout of $1.00 and you anticipate the stock to reach up to $1.50 based on a major resistance up ahead.
After several months, your analysis proves correct and the stock rises to $1.50. There are two actions you could take.
When you first made the decision to purchase, you told yourself to sell out at $1.50, locking in an outstanding 50 cent profit given the technical evidence which is one action.
On the other hand, the emotional side of you kicks in and tells you not to close out because you may be limiting your chances of further profit, irrespective of what the logical technical evidence tells you.
This is the second action, to wait and see what will happen with the price. This is where the greed and hope factor kicks in.
You decided with the second action to wait and selling pressure begins to mount, sending the stock price lower over the coming weeks, showing evidence of lower highs and lower lows. You start feeling regret, wishing you could have sold at $1.50, and in hindsight it would have been a good idea.
Once again, taking a profit at an already predetermined set price based on logical technical evidence is easier said than done. So when a target hits, take the courage to sell out at least half the amount and trail up the stop level for the remainder of the shares to lock in a profit, and leave some exposure to catch further potential upside.
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