How high can it go? When to take profits
Entering a trade is the easy part.
Finding potential trades to take is the easy part.
Everyone seems to focus their energy on finding the next great swing trade setup to take.
While obviously that’s great and I love to do that too, the hardest part for me is always determining when I should sell!
So many times I would guess right and my trade would immediately start working out, bouncing right off of the pivot point, and retracing higher! I would pat myself on the back, as I watched my trade move sharply higher. When I first started to swing trade, I never even thought about where I should sell. I had targets for my entry points, but never would consider my sell target. Invariably, I would then watch as the stock would turn and start heading back down. “Hang on”, I thought, “This is just a slight pause, it will continue to go way higher.”.
More often than not, there I was, back at my entry point. Just as often, I would then continue to hold and would then show a loss, eventually selling what was a great winning trade for a loss!
Talk about a good slap across the face!
I started to realize that not having set my profit expectations, my greed would get the best of me, time after time.
However, with swing trading positive reversals, it is pretty easy to set a realistic profit targets. I do that all the time now.
Like most of my trading methods, my sell target is pretty darn simple…
Best case scenario is to sell at or near the most recent high, and more likely at 50% to 75% of most recent previous up and most recent down movement.
Here are some examples:
Look at this chart of VRAY. Take a look at my entry point (GREEN circle). You can see the entry point was perfect at the support level (BLUE line). I highlighted the maximum expected profit that I could realistically hope to expect at the most recent highs (RED line).
However, from my experience, my swing trades never make it up to that point. They run out of steam before they hit that most recent high. Sometimes the stock does make a pause and then passes that red resistance line, but who knows how long that could take? Also, more often than not, I end up losing my profits and sometimes even would have a loss if I held out for that maximum profit. Instead, I look for a move between 50% to 75% of the previous climb and decline.
Take a look at the shaded grey box: You can see that on the left side of the grey box, the move up experienced resistance and was pushed back. Then after that pause, it surged to the red line. When I entered the trade (GREEN circle), I realized that more likely than not, we would see a turn near that previous congestion at the grey box. That’s exactly what happened. Look at how if I was greedy (like I used to be), I would have watched a majority of my paper profits evaporate.
I move my sell stops up as the days progress to protect a majority of my profits.
Here’s another example:
Same thing here with NCLH. My entry is highlighted in the GREEN circle. The max expected profit would be the GREEN line, which is extreme high of the previous move up. A more realistic expectation is to expect this swing up to be pushed back at previous resistance and congestion areas. As the price approached about half way up, it reached the grey boxed area that matched the two previous congestion areas I highlighted. Sure enough, it started stuttering, unable to go anywhere for 4 days. Then look at that huge ugly red candle. Ideally, move your sell stop under that grey box and if it moves higher, great. But if it dumps sharply like this one did, you are out with a profit.
Let’s keep going…
More of the same with ATI, right? Let’s look a little closer at this one, specifically look at the candlesticks:
Do you notice that on the way up, there was that HUGE white candlestick (white because the close was above the open)?
Then, look at the next day, a small black candlestick because while it closed higher than the previous day, it is black because the close was BELOW the open. The signs are that the move is losing steam.
Then look at that small bodied RED candle with the huge upper wick. That’s an inverted hammer. Don’t worry about the name, just think about this particular day’s trading action. It opened lower than the prior day’s close, it traded way higher, reaching the red resistance line, then was pushed down hard, closing below the open and below the previous day’s close! Clearly, this move is over. GET OUT NOW!
If I had held on, wanting to get greedy, look what happened the next day. OUCH! A huge red candle. A complete dump.
All-right, one more for you…
I wanted to show you this chart because of the previous peaks up and down before the big move up. Those previous peaks were turned back again 3 times (the RED line)! Then we had the big move up, where it hit the absolute peak (at the GREEN line). My entry point is in the green circle. While it would be nice to hope that we would hit the GREEN line again, a more realistic expectation would be to see a push-back at the RED line. That’s because this is a pretty strong resistance point. It was hit and pushed back three times with authority!
There are sellers waiting to unload at that point. While it could push through again, it would be tough. Notice how that big white candle did close above the red line, but the next day, it opened right near the previous day’s close, traded a little higher (look at that baby, baby wick!), and then dumped the rest of the day, closing at the absolute low.
After that big white candle, it would be ideal to set a sell stop right below the resistance line in red. If it moved higher, great! It could have very well, dipped, hit your sell stop and move higher towards the GREEN line. If that happens, I don’t kick myself like I used to. That’s because the odds are that this RED line is going to be a significant hurdle to overcome. It needs to be respected.
In this case, you would have protected most of your profits by setting a sell stop, getting you out before most of that red candle appeared.
So there you have it…my relatively simple way to set realistic profit expectations!
One reason why I like swing trading positive reversal patterns is because by looking at the chart, you can see a realistic level of when you might want to sell. The key is to figure out these levels BEFORE you enter your trade. Then, when you are in the trade, DO NOT get greedy and try to hold on, thinking you will hit that extreme peak. Always keep realistic expectations and don’t get caught up in the frenzy as your trade works out and moves higher.
You are a trader. If you protect your profits and aren’t greedy, you will be a trader for a long time. You are going to be making hundreds of trades. Thousands of trades! The trade you are in now, is just one of many. Take your profit and move on to the next one!
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