Locking in Profits
Recommended strategy which capitalizes by locking in profits: Ten Steps To Profitable Trading.
Everyone knows what a stop loss is and what it’s for. If you don’t, then in quite simple terms it protects your capital from heavy losses. If a stock price turns against you after you have taken your position your stop loss gets triggered and your position is sold, thereby cutting any further losses.
Of course in order for a loss to actually be realized you need to actually sell. The alternative is to hold on to the losing stock for however long it takes to recover to the price you bought in at. If you’re lucky and it does then you’ve not actually realized a loss, but you will have effectively tied up your capital for that period of time during which it could be considered as ‘dead money’
However the stop loss is not the only stop you can use, or should use. Stops not only protect your capital from losses, they also can be used to protect your profits from evaporating.
In order to do this you need to move your original stop loss up to follow the stock price as it moves up from your original buy in price. Don’t get too close as stock prices move up and down as they trend upwards, and you don’t want to get stopped out with minor gains when the stock still has a long way to go.
Conversely, you don’t want to hang too far behind so that if you do get stopped out you lose too much of the profit you have made.
This ‘trailing stop’ when used correctly will lock in your profits as the stock price moves up and only get triggered when the stock eventually runs out of steam and begins a long and protracted downward slide. The locking in of profits will ensure your profits will be realized at the top, before the long downward slide begins.
So when should you start moving your stop up from a ‘stop loss’ to a ‘breakeven stop’ to something more positive like a ‘stop gain’ and lock in profits?
The answer is roughly between ten days and two weeks, or after the stock has continued upwards creating a number of resistance levels and significant support levels going up. It’s the significant support levels going up that we are interested in. The more significant the better. Locking in profits is covered extensively in the ‘Secrets of Successful Traders‘.
As the stock price rises, move your stop up to just below the next significant support level going up. If you can use an automated order and give it plenty of leeway in case of support level testing, perhaps consider being even more generous than at other times by allowing a half point clearance, or more.
The ‘gain stop’ will effectively lock in at least some profit should the stock turn around and head back down again. Don’t forget though, it would need enough downward momentum to break through that significant support level before triggering your stop gain. That’s quite a lot of selling needed to do that.
Notwithstanding any bad news which may have surfaced, and as we know it was a good choice of company to start with, there’s no reason to suppose it won’t continue onwards and upwards.
Provided the stock is true to its recent chart history it should continue to move upwards for the short term, making significant support levels going up as it does. This part is all part of the ‘mind set’ you can learn more about in Stock Trading Nitty Gritty… follow the link.
You will find that a new significant support level will get created every ten days to two weeks, so to optimally manage your stock will be required you to re-set your gain stops every ten days to two weeks.
The beauty is we know that no matter what happens now, we will walk away from this trade with more money than we put in.
Not many will do that, and if you are lucky enough to have chosen a stock which doesn’t have any deep pull-backs on its way up and therefore doesn’t breach any of your gain stops, then before long you could well be holding a small fortune.
It won’t go on up forever like this, and at some point you will get stopped out. If you’re luckier still (and this does happen quite often) the peak where you get stopped out with your gains could be accompanied by a jump in price which you can take advantage of.
There’s a great little strategy you can learn if you’re new to trading and want to avoid the pitfalls almost all other novice traders make, you should take a look at the Ten Steps To Profitable Trading.
It works by trading on pullbacks, thereby keeping you from buying in at the wrong time. There’s nothing worse than watching your trades drop in price every time you buy in. We’ve all been through it.