A good question came about in the comments section of my last post that asked "when do you take profits?"
It is nice to talk about trading for a change, so let's use an example...
First, you have to examine the style of trader you are...do you swing trade or trend trade?
In this market it is much easier to be a swing trader. In fact, with the exception of last year, I have always been a swing trader. As a swing trader, the objective is to "swing" within a trade from a top to a bottom, or vice versa. Like so...
Buy a dip, sell a rip, and try to pick a reasonable spot to take profits. This proves difficult for some, since emotion beats us up for not having the sense to pick the absolute top or bottom in our efforts. If you feel that way, you should try to move on. As a swing trader, I have become quite comfortable with a portion of the move.
As you look at the chart above, doesn't it look like a relatively simple process in hindsight?
As you move forward, think about some simple strategies that can be used to plan the trade out in advance to aide you in this process. Here are a few ideas...
Set target prices.
In the example above, let's say the average move is about $5. Is it reasonable to use that as a price target?
What if the stock moves more?
This is where I like to get fancy with taking a portion of my profits. The question I was asked mentioned "what if I only had a small number of contracts?" Sell what you can to lock in the gain, and let the smaller portion ride.
What if the stock doesn't make it to your target price?
Then your target price was inherently wrong. This is where stop orders are of value. When I used to use them, I went through different phases. ATR, fixed percentage, trailing, etc. I hate having stop orders take me out of profitable trades, and that is why I stopped using them.
You can also use oscillators for this purpose. A keen eye can see hidden oscillators in the price of any financial instrument, but that's okay. My 10 speed still has training wheels "just in case." They can offer good signals as they start to unwind, like so...
Above is a 7-3 stochastic. As you can see, the signals are timely. If you can see weakness taking place in price and volume, the indicator isn't necessary. However, it is a good teacher to illustrate what to look for in a "weakening top or bottom." Feel free to add any ideas or strategies you currently use to get some other ideas flowing.
