Arguably one of the toughest decisions is knowing when to take profit: Do I sell.....
At resistance
Half at 1:1 Reward:Risk so that the remaining shares are risk free
All at price targets or when 2:1 or 3:1 Reward:Risk is met
Half at 3:1 or 2:1 Reward:Risk
All when Change of Character occurs and their is a shift in the market
Below we will discuss each of your options and adaptations for you to make you own decision.
There is a reason why it is called resistance
Price cannot seem to rise above this area in the past
This is due to large order blocks to sell or short the market at a specific price
If more people are selling than buying at a price level, then price falls; the opposite is also true when more people are buying then selling, price rises.
Remember, when hedge funds trade are shorting, selling their positions, or buying they are doing it in hundreds of thousands to millions of shares. It is almost impossible for them to complete their efforts at one time due to the availability of the stock or the market needs to meet their target for them to execute.
The same is also true about stock buybacks - when companies want to repurchase their stock from the market because they believe it will go up in the future. Buybacks can take as much as six months to a year to repurchase stocks at a given price level.
How do you exit at resistance?
Hopefully, you have marked off your resistance levels prior to entering a trade and determining that your resistance level is far enough away that you can get your desired profitability (2:1 or 3:1).
Once you hit your target, consider selling at least half your position and moving the other half up to breakeven or slightly above to avoid losing money on a winning trade. This will leave the remaining half of your position to be risk free or as some say "playing with the house's money" (playing with your profit).
Remember, the goal is to limit our risk, not overexpose ourselves to risk
See Hawaiian Electric and the Lahaina fires on August 8-9 and how their stock plummeted a few days later after speculation of HR being potentially responsible for the fire.
Closed at $37.36 on August 7, began to drop over the next few days to $32.40 on August 11, speculation occurred over the weekend, Opened on Monday at $20.00 on August 14, almost one year later the stock closed at $8.49 on July 3 a 77% price drop in the stock price.
Prior to the fires, HE was your typical energy company that provided consistent dividends to shareholders every quarter (every three months). My friend's uncle regularly purchased shares and used the dividends to reinvest into other stocks. After the fall of the stock price, my friend said he lost an estimated $500,000 in value since the price drop.
This is a reminder that even consistent, trustworthy, and monopolies (only electric company in the state) can see dramatic changes in price and you should not put all of your eggs into one basket.
Why would someone invest so much into HE?
The quick answer is consistent returns over the years made it a lucrative option
Imagine that my friend's uncle had approximately 18,500 shares of HE valued at $691,160 prior to the crash (note that these shares were purchased over time and may have been purchased for as low as $12-55 over the years so their dollar cost average could be well under the $37.36 value
Each quarter HE paid a dividend to shareholders. Below is a chart of how much was made per share and its total. For arguements sake, lets assume all of the shares were purchased prior to 2016 and no additional shares were purchased. The last number in the line represents the cumulative dividends they have collected over 10 years.
2013 Annual Dividend Payout was $1.24/share; 18,500 shares x $1.24 = $22,940
2014 Annual Dividend Payout was $1.24/share; 18,500 shares x $1.24 = $22,940, Total $45,880
2015 Annual Dividend Payout was $1.24/share; 18,500 shares x $1.24 = $22,940, Total $68,820
2016 Annual Dividend Payout was $1.24/share; 18,500 shares x $1.24 = $22,940, Total $91,760
2017 Annual Dividend Payout was $1.24/share; 18,500 shares x $1.24 = $22,940, Total $114,700
2018 Annual Dividend Payout was $1.24/share; 18,500 shares x $1.24 = $22,940, Total $137,640
2019 Annual Dividend Payout was $1.28/share; 18,500 shares x $1.28 = $23,680, Total $161,320
2020 Annual Dividend Payout was $1.32/share; 18,500 shares x $1.32 = $24,420, Total $185,740
2021 Annual Dividend Payout was $1.36/share; 18,500 shares x $1.36 = $25,160, Total $210,900
2022 Annual Dividend Payout was $1.40/share; 18,500 shares x $1.40 = $25,900, Total $236,800
Current value of 18,500 shares at $8.49 is $157,065 + $236,800 (dividends over 10 years) = $393,865
Here are some other things to consider.
All of that money was invested into other stocks over the years. Even if the money were put into an index like SPY
He would have 904 shares of SPY over the course of ten years off dividends (from profits)
The total value of the money invested would be worth $498,519.84; roughly what he lost in value from the drop of HE
Let's assume his average price was $25/share or $462,500
Based on $498,519.84 in value plus $157,065 in current value, he would have $655,584.84 on a $462,500 or a 70% return over the 10 years.
More importantly, prior to the collapse, his shares would have been worth $691,160 ($37.36 close) plus his $498,519.84 investment in SPY for a grand total of $1,189,679.84
Consider if he had invested in stocks like NVDA, AAPL, TSLA that have seen their value increase by more than 20x gains versus SPY with a 3-4x gain over the last 10 years you would be talking about a much larger portfolio.
Generally speaking, the answer would be no. These are the most common reasons to take half at 1:1.
You are playing a shorter intraday time frame (day trading - 5 min, 10 min, 15 min) and securing profits to make it risk free is crucial to long term profitability
You notice a shift in the market that might give back all of your profits
Upcoming news may come from your position (Earnings, Announcements) and you want to lock in your efforts
Your position has been stagnant and you want to reinvest your money to another position that looks promising
While these are noteworthy and you have to be aware of these types of things, we often want to stick with our game plan under normal circumstances and when there is no news upcoming.
Scared money does not make money
Locking in a profit is the most important thing about trading. You will never be sad by executing your trade to perfection and hitting your price targets and achieving your Reward:Risk that you set out to do; I mean that is exactly what we want each and every time.
Locking in your profit allows you to reallocate the money to other potential stocks that may be moving
Satisfaction and a sense of accomplishment from identifying, being patient, and executing your strategy
Giving yourself the discipline of sticking to your plan
Incremental gains from each win add up. It is far easier to find three stocks that rise to a 2:1 Reward:Risk than one stock that returns 6:1.
The downside to this strategy is FOMO (Fear of Missing Out)
At some point you will take profit and close your position only to see the stock surge even higher
While we should be happy, inherently we will often be met with regret, believe our strategy was incorrect - though it was not, and we will start to second guess or efforts.
And even though we could reenter into the position, we may take a risk that can often give back our profits and question what we did wrong.
That being said, there is nothing wrong with taking your profits and closing your position as you are locking in profits and have completely executed a perfect trade. But, if you want to reenter, you must have discipline to use your strategy to limit risk and protect your money.
This one is simple.
When you hit your target sell half of your shares
For your remaining shares, move your stop to break even so you have a risk free trade on your remaining shares and are protecting the profit you made from the half you sold
Similar to the previous explanation, small wins add up and are easier to obtain (Three 2:1 wins are easier than finding one 6:1)
Major Difference from Above
No FOMO
No wondering if I had stayed in, second guessing your strategy, or not knowing how to reenter into a trade
Allows you, to have a chance, to increase your profitability substantially. By hitting winners that are 4:1 or greater, this helps to raise your overall returns and offset losers and positions you needed to close early.
In one trade, I have sold half of a position to make $450, a quarter to make $350, and the remaining quarter to make $420; the remaining quarters almost doubling the profit of the first half.
Personally, I like to trade using pivots in the market. This typically gives me the entry points of hedge funds buying patterns and allows me to follow the overall trend. Here are some of the concepts you need to know in order to understand Change of Character. Also be sure to watch my video on Break of Structure/Change of Character.
Break in Structure (Continued momentum and direction)
In a downtrend, we see a pullback and the price rise slightly only to see it break through the previous low again
In an uptrend, we see a pullback from its surge up and then see it break through the previous high to continue upward
Change of Character
In a downtrend, we are breaking a previous high
In an uptrend, we are breaking a previous low
At the end of the day, you need to pick what works best for you and how you can protect your money at all costs. For me personally, here are a few things I consider when taking profit.
I look for my 3:1 Reward:Risk
If I hit my target and momentum and candle formations are still favorable, I wait and hold for weakness or if it drops back to my target to take profit (50-75%) depending on the strength of the move.
If at any point I hit 6:1 Reward:Risk, I will consider selling half my position (looking at the strength of the stock movement). This will guarantee me 3:1 based on my full investment and my remaining can be left as a a runner.
In general, if a stock remains above the 8MA, I will continue staying in the trade until it closes near or below the 8MA
Generally speaking, if I connect 2-3 pivots to make a trend line and it breaks that trend line I will sell at least 80% of my position or the remaining position if I have already taken profit previously.