Taking Profits Too Early?

By: ispeculatornew
Date posted: 05.28.2012 (5:00 am) | Write a Comment  (0 Comments)

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Last Monday turned out to be a disappointment for some because I did not have any new trades. I’m sorry to say that I will disappoint again. I do expect to resume making those picks next week though with a fresher mind. I’d love to always be making new picks but when you are on a losing streak, it sometimes makes sense to take some time to reflect on what has gone wrong to see if any adjustment is required. I would rarely make such a change in the middle of the year because I like to think those through but it’s always possible. In that sense, the reader’s email that I discussed last week was very helpful. It’s always good to get secondary opinions. Today, I wanted to discuss two last points regarding that email. Here is one more quote from that email:

Alternative Shorts

I understand that the alternatives for trading pairs are not easy. Perhaps you could have “alternate shorts,” to you main short pick, in case the main pick is not available to short, or has too high an annual interest.

I very much see how this could be useful in cases where going short the stock does not work. This reader has taken short positions with options in a few cases to get around this problem which would work well in general but adds a level of complexity that many of you prefer to stay away from. Alternate shorts are difficult to do because it’s already difficult to find great stock ideas sometimes, finding others could prove to be a big challenge. I will try to provide more information about my thoughts both here and in the free tech stock newsletter so hopefully that will end up working well.

Taking Profits Too Early?

if you eliminated profit taking altogether, and just held winning positions to year end, you would greatly decrease slippage losses from frequent trading, and my guess is, probably increase your profits, too. I don’t know if you can run that data analysis on the your past years of trading. If you could, the results might be interesting.

Talk about hitting a nail on the head. Many have discussed my entry/exit points but I think this is something I truly need to look into. Clearly, there is something to using stop losses to avoid losing too much on a trade but most good traders also know how to ride on their winners. That is NOT something that I currently do and it’s something that I’d like to do more in the future.

One big reason is that when I look for stock pairs to trade, I usually look for stocks that are very wrongly (in my opinion obviously) priced. This would imply potential/expected profits of 30-40% or more in some cases. Closing them as soon as they reach 20% does seem early on several occasions. What I do not like though is simply letting them open no matter what where I could end up giving back my gains. There are some alternatives, where I could close trades once they have fallen back to flat, etc. It’s not an easy problem but it’s something I’m seriously considering changing for next year and I’d love to get your thoughts on this.

I will certainly keep you posted on how my thoughts evolve on this subject as it could end up making big differences in my trading.

How do you manage your portfolio? Do you use stop losses? stop gains? How do you determine the right moment to close out your trades?

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