what is the best way to know when to take profits from a stock position?

Question

one has a position on a stock and it starts to go in your favor. how does one know when to cash-out or let it run. what are the best strategies( i know about stops orders and mental stops, but for me those strategies seem to always result in tons of work to carefully follow the days high to keep up with mental stops. stop orders seem like a scam because they always get taken out and then the stock moves the other way leaving me out of the profitable move) what are some other real world solutions for keeping more profits on a good short or long position?

Answer 1

If you knew exactly how how the stock would go, then you could cash out at that price. But, you don't know how high the stock will go. No one does. The easiest way that you can work this is to set a profit objective and cash out when that objective is hit. For example, if you buy a stock at $50 and you want to earn 10%, when it reaches $55, you cash out. Yes, prices could go higher, but how do you know for a fact they will?

And stops are not scams, they are there to get you out of a losing position or lock in profits in a winning position. The reason that the stop gets taken out and moves the other way is that the pro's know where the majority of investors place their stops and the pros run those stops taking them out.

But, let's say you do put in a stop order, and it's triggered and you're out. How do you know whether the retracement in prices is just a reaction in the trend or a trend change? Unless you have a crystal ball or can see into the future, you don't know. Now do you see why you can just ask that question on "when to take profits"? Unless you can see into the future and see exactly how high the stock will go, you have no idea of when to cash out. You can use a trailing top to lock in profits and the stock moves in your direction.

Instead of beating yourself up for not getting more profits, be grateful you got profits. That's like moaning about someone giving you a brand new Acura on a deal, but later finding out, if you had held on, you could have gotten a Mercedes. Well, you didn't know that if you held out, you'd get a Mercedes, so be happy you got the Acura.

One of the surest ways to get taken to the cleaners is to let greed get in the way. Sure, you could make more profits, but you don't know that. You could wait for prices to go higher and find out that they've reversed and the profits you had and now dwindling.

There is not guaranteed way to get the most money out of a trade. All you can do it manage it and to what you can out.

I don't trade equities (I trade derivatives & fx), but in the FX markets, the trailing stops are automotic, meaning that if you specificy for every 10 pips, you move the trailing stop 10 pips, you don't have to worry about it. All you do is set the trade and let it run. If the pair runs in your favor, the trailing stop will automatically adjust until it is triggered.

Answer 2

You say you know about stops, but do you know about stop placement?

You are trying to ride some form of trend or upside momentum. The trend could be a line or a moving average. Every time it retraces or backs off, it gives you a Support level. Your stop goes under the previous Support and/or under the trend line. If the trendline is broken, then the trend has changed, and you want to be out anyway.

Each time a new support level is identified, then you can safely move your stop up, not before. This is an active trailing stop.

I try to match the Support level with something else, whether an old Support level or previous High or Low. The more things confirming this Support level, the more significant it is.

An "automatic" trailing stop, referred to elsewhere in one of the other answers here, is for specific instances, and should not be used in your case, or all cases. For example, if the stock has had a good run, and you're price target is close, or has been reached, and you're thinking about taking it off anyway, put on an automatic trailing stop and it will get you out with the most profit.

Some people use Fibonacci retracement levels for stops, and Fib extensions for targets. If these Fib levels match with you Support or Resistance levels, then you have confirmation and a more significant reason for Stop placement.

If you understand market dynamics, then you can use the Stop to tell you when to get out of the market. Just arbitrarily setting a Stop, increases your odds of loss by at least 50%, which seems to be what you've been experiencing.

The markets are not arbitrary, and they don't care how much you can lose or how big your account is. But you have to let these profits run to make up for the losses, the slippage, the errors, and the surprises.

Answer 3

Working for a large institutional investor, the best lesson I can give to you is you should have a clear idea of what to expect from a stock when you buy it (we call it an investment thesis).

A lot of investors will buy a stock cause it is undervalued, but can never articualte why it is undervalued or what would constitute an appropriate valuation.

At the risk of oversimplifying, let me give you a core way at coming to a "target price" not driven by sell-side pitches. Assume a stock price is based on an EPS and a corresponding multiple to the EPS.

1) Do you expect the company to exceed consensus ests?

Most concensus ests tend to reflect company guidance, so they generally tend to be in-line with expectations. Check the history of the companies earnings, to see if they have been in a recent pattern of beating or missing ests. Since companies have the greatest leverage in setting the guidance for the estimates, they should set expectations they can meet or beat (underpromise, overdeliver)

2) Do you expect the companies P/E multiple to expand or contract?

Based on the company compared to its major competitors and industry, what is the company's P/E mutliple? Understand why the company is trading at a premium or discount to its competitors, and if you can justify a good reason for why the mutliple should expand (or recent contraction has been unreasonable), then take that into account.

Conclusion - once the company meets your est and P/E multiple target and becomes fairly (or fully) valued, SELL. At that point the upside from momentum or the bigger fool theory (someone else will buy it from me for more tomorrow) just isn't worth it.

Unless you have a predetermiend target going in, there is no point being in the stock.

Answer 4

alot of traders use technical analysis to decide where to place their limit. study technicals, go to www.investopedia.com . I dont see how you could profitably trade w/out knowing when to take profit? learn support and resistence at that website, there are several differant ways to set your limits but start there.

gateway is basically telling you to get out when you made the percentage of profit that fits your needs, that never works, not in the long run anyways. use your technicals, and try to find trades that give you 2-3 times the reward over risk, that way you can be wrong 2 out of 3 times and still break even.

i know you hate when your stops are triggered, and the market moves right back in the direction of your favor, we all do. if your having that problem set wider, or take a look back at your entry point, if you dont know where to exit then your probably not entering the trade properly either. check out that website, and a great book i started out w/, "rule the freakin markets" good luck

Answer 5

This depends on the type of investor you are.

Scalper = 15 minutes
Daytrader = 2 hours
Swing trader = 2 days
Medium-Hold Trader=6 months
Buy-And-Hold Trader=5 years
Warren Buffet = never

As for me, I take HALF off the table if I have made 3%. This is because today's modern market presents SECTOR ROTATION by fund managers. What's hot tends not to stay hot for too long.

Also, if you have LOW FEES for your trades ($8 to $12 per trade) it is easier to scale out this way.

If you are having great luck with your profit, then the ideal thing is to scale out your COST BASIS (original investment) and then whatever you continue to make is gravy and if it goes to zero (unlikely) you still lose nothing.

The theme in 2006 has been DON'T BE SHY TO TAKE MONEY OFF THE TABLE.

Good luck to you!