Tuesday, October 29, 2013

I'm making money! Sell! Sell! Sell!

If you followed my break test enter trade setup I spoke about a couple of posts back you would be in a profit right now.  So what do most people do when they are in a profitable position?  Here are the top three strategies executed by the befuddled trader when in a profitable position.

1- Sell way too early.  
Reason:  I believe there is an innate desire to prove oneself as correct so either they ignore the exit strategy they have as part of their trading plan or don't have an exit strategy to being with.

2 - Wait for unrealistic profits.
Reason:  Traders are greedy and besides they need a double or triple on this position to make up for all their other losses.

3- Watch a profitable position turn into a loser. 
Reason:  This is directly related to strategy number 2 above.  Greed turns to hope which turns to a losing position which turns to frustration which leads to even more bad trading decisions.

So what is the right way to manage a profitable position?  The correct answer is to have an exit strategy that you will stick to each and every time.  Everyone wants to sell at the top and buy at the bottom.  As you saw with the break test and enter trade setup up we didn't necessarily buy at the bottom we waited for a break above a previous high to get into the trade shortly after support held.  Therefore the reverse would be true for exiting.  Look to see where the next resistance level is and wait to see if that level is holding and sell on a break of the previous low.   However, if price is progressing upward raise your stop loss (which you should have by the way) at each new support level.

The SPX 15min candlestick chart below highlights where we would have entered the trade and placed our initial stop loss and where we have moved our stop as price continued to rally. With all new positions the stop loss is used to limit losses just in case the market goes against shortly after placing your trade.  Raising of the stop is to protect profits.  Simple plan no?
How do we know which level to raise our stop loss?  Let's pull out our ole' dependable SPX PnF 15min chart (the same one that got us in the trade) and see if we can identify where a previous level of resistance was broken.  You can see that 1764.6 was previous resistance before prices move down slight then was broken as prices rallied.  So that is the only logical place I would raise my stop loss to protect profits.   If stopped out the profit would not be huge but still allows the trade room to move.  More importantly we are managing our trade and risk in a consistent way.  So as price continues to move to nose bleed levels and as more and more people are pounding the table calling for a correction (and some calling for a crash) we stay the course and trade what we see not what we hope.

Thanks for reading.

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