Tuesday, September 25, 2007

When Should I Take A Profit - 3 Selling Strategies

It doesn't happen often, but when it does, its tough to contain your excitement. The stock you bought at $0.95 is now worth over $2.30, and you begin to imagine what you can buy with your new found wealth. A car? Down payment on a house? We've heard the trading mantra to let your winners run. So when you are up over 150%, what do you do then? Does the same advice hold true?

The biggest challenge that any trader will be faced with is when to sell. That becomes even more difficult when emotion gets involved. It tough enough fighting the emotion to hold onto a losing stock. It's even worse when facing the decision to sell. You're worried about selling too early, missing out on even more gains, and you're worried that if you dont lock in your profits now, you're going to lose them. Its natural, but, you have to fight it.

So what do you do?

The first thing to remember that while greed is good, too much of a good thing isnt. Pigs get slaughtered. While it may be an over used cliche, its funny how true it is.

You have 3 strategies to choose from:

1. Sell 100% of your position

Nothing wrong with taking your money off the table. Taking your profits is what its all about. The key here is not to look back. Enjoy your profits, turn off your computer, walk away from your computer, and think about how you're going to reward your good fortune.

2. Sell 50% of your position

This is the best way to hedge your bets if you think there is still more upside, while minimizing risk. Now you are risking the same amount of capital that you started with. If it moves lower, then you know what to do with the other half.

If the stock does retrace, and appears ready to make another move, you can re-enter the position while lowering your risk at the same time. If the stock moves from a high of $2.30 and moves back to create support at $2.00, you know where the downside risk is.

3. Don't sell, but wait.

If you are an experienced technical analyst, then just wait for your sell signals. You may not be able to time the top, but you'll know when the sellers are about to leave for the exits.

There is a 4th strategy that you can take, however, it involves a mindset more than anything. If you're like me, its easier to sell if my stop loss point is hit than it is in trying to figure out if there is more upside. What I do, is I take the current price, and use that as my entry price. So if I bought the stock right now, where would I set my stop loss point? If its hit, I sell. If it moves higher, I use the same exercise.

Its important to remember that these strategies work well for the short-term trader. If you're in it for the long haul, you'll have a different set of rules to follow.

If you start thinking about the amount of money you have made, or might be losing by selling slightly lower, do yourself a favor and just sell. Your emotions have the best of you. On the other hand, if play it like you just entered, your focus in on the share price, not the amount of profit you have.

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