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I have used an approach recommended by Joe Ross and it has proved immensely
valuable. Let's say we have entered a trade in a volatile issue with 1,000
shares. If I have made the right call, I will exit half the position after
what I perceive to be a nice gain, assuming the stock continues to trend
aggressively in my direction on 5-minute charts. I will exit another 300
shares further up (or down on a short) after what I perceive to be another
handsome gain, again assuming the trend continues. I will exit the final
200 shares when I perceive a reversal in the making.
I have been burned badly before with the certain brokerage I currently use
(begins with D, has 5 letters in its name, ends in K). As an example, I was
7 points ahead on EWBX on a highly volatile day in its history when I saw
the size change and sellers enter. I placed a market order to sell. I was
filled 6 minutes later at what amounted to a 10 point loss, just as the
downtrend began to reverse, at the low for the session. Similar situations
have reared their ugly heads at least 5 times. Needless to say, I'm
switching brokers, but my exit strategy should not change much. Using this
approach you will not have optimal profits, but you can have profits which
will dwarf any potential loss on the third tranche if the stock turns
suddenly and you can't get a reasonable fill.
Of course, if the trend appears to be turning before I get to exiting a
portion of my position, I dump it all by entering a limit order 4 minimum
ticks below the current bid (long) or above the current ask (short). That
way I will not be filled at an extreme price, well outside the current
spread (which seems to happen all too often with the volatile issues I
play), and chances are good that I will actually get out at the current bid
(long) or ask (short).
The reason I use the term "perceive" above is that perception varies by
trader depending on the approach used, overall comfort level, direction of
the overall market and industry being played, and whether news played a role
in the entry decision, and a range of other factors. I have ridden out 2-3
point losses to end the trade in a gain, by simply waiting. This strategy
is not assumed without risk (albeit a calculated one) and should not be done
until the requisite "gut feel" element has become a part of your trading.
There is no such thing as taking profits "early". It's all about perception
and sticking to a cardinal set of rules which you lay out as part of your
strategy. On a global level, objective no. 1 is always preservation of
capital, objective no. 2 is taking profits. If you have met both
objectives, be happy that your trade was a success and move on to something
else. My most disastrous mistakes have been made when I chased a stock.
Let the chart talk to you and let your rational interpretation guide your
exit decision.
Hope this helps.
Regards,
Paul
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