Best Time To Sell A Stock
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Hi, In today’s video we discuss one of the most important topics in trading - Trade Management.
Finding an entry point is the easier part of trading, you just need a defined setup to be in the trade. What differentiates successful traders from others is their maturity when it comes to taking profits and losses. In essence, your losses should be much smaller than your profits, and for this to be achieved we need great trade management.
As a breakout trader, I always look for the reward to be much higher than the risk in a trade. That way even when you end up being wrong more often than being right, you come out profitable at the other end.
We can see my longer-term trading statistics here, showing my average loss and my average win. When combined we can see the equity curve of all my past trades.
To achieve this, I have listed several methods in this video with my special proprietary technique towards the end of the video. So, make sure you watch the video till the end to get all the perspectives and frame your exit strategy accordingly.
For the reward to be much higher than the risk, it becomes essential to let your winners ride. Now, letting the winners ride can be psychologically demanding for many traders, especially when volatility strikes and the profits fluctuate rapidly, just as we have seen in the last 18 months. Leaving the trade management part of trading on discretion is fraught with risk. You might be too early or too late to exit, impacting on your trading metrics negatively. This is why it’s necessary to have a plan in place to ride the profits, not just cutting the losses short.
The first thing you should do is to enter each setup with an open mind. You won’t know in advance which trade has a higher return potential than others. This is why, it’s always better to play along with the price behavior and have systems that help you exit when the price behaves a certain way.
Let’s see how you can manage your profitable trades by not killing the trade too early and also by not giving up too much of the move.
Different traders follow different systems to exit profitable trades. For example, Mark Minervini advocates maintaining your trading metrics by gunning for at least 2 times the average risk, 3 times is desirable if your win rate is lower than 40%. Mark suggests exiting at least half the position once the reward reaches the desired multiple of risk.
On the other hand, Kristjan Qullamaggie, whom we also discussed in one of our previous videos, advocates selling half or two-thirds of the position in the 4 to 5 days after trade initiation irrespective of the performance of the trade and riding the rest of the position using the 10 EMA crossover.
Mark Minervini’s approach requires being on top of your trading metrics, meaning you might not get high returns from each trade, but you will be taking a lot more trades and your churn would be higher. You might also be able to maintain a great win rate, because if your profit expectations are not too high, you should be able to stay profitable on a large number of trades. For example, if you are aiming for an average win of 10-15% on each trade, you will get more trades that will deliver those kinds of returns. On the other hand, if you aim to win 40% and beyond on your winning trades, as do I, fewer trades will generally be able to deliver those returns, and there will be several reversals from 10, 15, or 20%. However, as I keep reminding everyone in our group, it is the longer-term outcome that matters despite the frustrations that come with shorter term reversals.
When following such a system for exits, many reduce the position size when the reward reaches a desired multiple of the risk, whilst trailing the rest of the position using rules, of which there are many. It could be a moving average crossover, an indicator signal, price action, or simply another multiple of risk. Some traders exit full positions there and hunt for the next trade as there are ample opportunities that can deliver the same outcome. The approach you take depends on how comfortable you are with the churn and the effort of going back to the screen for opportunities.
Personally, I prefer the less time-consuming weekly charts to make my trade management decisions.
Qullamaggie’s approach is a little different than Mark Minervini’s. In his approach, a few trades will be responsible for most of your trading profits as you are gunning for trades that deliver several times more return than the risk you took on the trade. Therefore, there will be many more reversals and exits at breakeven and stop-loss levels. Every once in a while however, you will get a huge winner that will make up for the past several losses and deliver profits.
If you are following a similar approach, you will have to be a lot more patient with your winning trades and let them run using an exit strategy. Here, the exit strategy is two-pronged. For you to not get stuck with trade lacking momentum, there is a rule in which you exit half or two-thirds of your position within 3 to 5 days irrespective of the performance of the trade. The balance has to be trailed with an exit strategy based on a moving average, another indicator, or price action.
You can also adopt a slightly different approach by dividing the trade’s exit, and framing rules for selling in strength and selling in weakness. Selling into strength would mean taking the money off when the stock price looks unsustainably extended. For example, some traders use the distance from the 200-day moving average as a reference point for selling into strength. You could sell half the position when the stock price is 100% from 200 day moving average and the rest when the price is further extended say 200% from the moving average. If the first leg of sell in strength gets executed and the price reverses, you can sell in weakness using another short-term moving average. For example, you can use a crossover with the 21-day moving average as the exit point for the rest of the trade. Alternatively, you can also use price action and exit the trade when the price breaches the previous swing low.
Many of these trade management approaches have either been used by me or back tested by me in the past, all of which have equal pro’s and cons. I share them to allow others to come to their own conclusion.
Now, let’s see how I manage my trades and how I deal with winning trades to squeeze the most out of them.
In my approach, I watch the Mac dee indicator on the weekly chart. Whenever the price is in momentum the blue Mac dee line stays above the red signal line. The first signal of momentum breaking is when the blue line closes below the signal line. In our approach when the crossover happens, we take note of the same and mark the low of that week as the raised stop for the trade. If the price reverses and continues trending, the weekly low will not be breached and the blue Mac dee line will once again go above the red line. We then wait for the next weekly crossover and mark the low of that particular week. Once the weekly price breaches the low of the marked candle, we exit the trade and lock in our profits.
One mistake that new traders generally make is to wait for the price to go back to the previous top in a long position or low in a short position. The high or low price becomes an aspirational anchor point even when the other signs we discussed in the video scream exit for the concerned trade. It is a must to set the expectations right in this regard. You can’t exit the trade at the highest or the lowest points, and therefore the only way to be at peace is to frame some trade management rules and stick to them. If your rules force you to exit a trade yet the price reverses and trends further, you must not regret exiting. Instead, you should find solace in the fact that you respected your rules and you have a solid guide for trade management in your trading arsenal.
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