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January 29, 2007
In this
week's free newsletter, we'll look at a common decision traders are often faced
with:
One Profit Target or Two?
Every one of us wants to maximize
our trading profits on every trade we make, and there are few better feelings in
trading than knowing you got the most out of a position.
Even a monkey can pick some winning
trades, so the subject of taking profits is one that applies to every single
trader - not only the great ones, but also those who may be struggling.
I'm of the opinion that different
trading conditions will call for different profit-taking styles. A
powerful move in the market or in a stock on the run should mean the bar is set
higher for a profit objective. Conversely, a choppy market environment
necessitates multiple exits as a way to book regular gains while minimizing the
effects of reversals that often occur within trading ranges.
Most all of the trades we have
taken here in recent months have had multiple profit targets associated
with them, generally because the market has been moving sideways and not
trending since November. That sets up a choppy trading environment
with less follow through to be found, so booking partial gains into an initial
pop not only lets us realize some gains, but it also reduces our risk in the
trade should it reverse (which frequently happens in choppy markets like this).
As a trend trader, I take a lot of
continuation setups for new entries, and that means I'm usually looking to
capture as much of the next move within a trend as possible. So, when I
find a particularly strong stock (or weak stock in the case of a
short sale) with good momentum, I
will go ahead and set one profit target which is at a more aggressive level, in
hopes of being able to capture a big percentage gain. Of course my risk
remains limited, as I prefer with every trade I take (every good trade starts
with limiting the downside), but when the momentum is there I want to be
more aggressive.
The current market environment is
perfect for setting multiple profit targets. These are the kinds of
conditions where hitting singles and using smaller market moves to unload shares
is a prudent strategy. However, once the major indexes are able to get out
of their trading ranges, the momentum should return and it will again be time to
get more aggressive with larger profit targets. For now though, I'm
scaling out of my winning trades on the way up and it's working considerably
better than setting just one profit target.
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Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
The Stock Bandit, Inc. - 17460 IH-35 N. #160, PMB 240 - Schertz, TX 78154
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