3 Tricks to Lock in Profits & 5 PowerRatings Stocks
Entering a trade is only half of the job. Any profits or losses remain speculative until the trade is closed.
It is often argued, wherever traders gather, if entering or exiting a trade is the most critical to determine profit or loss. Strong cases can be made for both sides of the debate. Market researcher and psychologist, Van Tharp provides a few examples of traders having success by randomly entering the market but using tight money management to close in his book.
While this is possible and can be done, it is not the optimal situation. Ideally, one wants to only enter trades that contain a quantifiable, proven edge and exit with a consistent rule based method. Our research has discovered that using a dynamic rule based exit method is the ideal for maximum profits. I am not talking about trailing stops here. In fact, the research clearly showed that stops failed to consistently improve the results of any system. Dynamic means that the exit strategy adjusts to price therefore isn’t a fixed percentage or number away from the current price. Unlike most stop loss tactics that lock in losses; the exit method should sell into strength to obtain the maximum gains.
Here are 3 proven tactics to optimally lock in your profits.
- The First Up Close Exit: This method was first made popular by trading promoter and student, Larry Williams. It entails exiting the trade after the stock had its first daily up close over the previous day. This is the simplest to understand strategy yet stood up very well to extensive testing.
- Close Above The Moving Average Strategy: Based on this rule, you would exit the trade on its first close above the 5-day Simple Moving Average. In the testing, out of 63,101 trades, 70% of the exits locked in the max gains with an average profit of 2.65%. The 10-day Moving Average can also be used but the percentage correct drops by 1% but the average gain increases by 0.15%.
- The 2-period RSI Exit Strategy: The trade is closed when the RSI(2) closes above 65, 70, or 75 on the day. The tests results out of the same sample size were 70% correct with a profit factor of up to 2.93%.
The primary lessons learned in the testing are to always sell into strength, the stronger the move the more you should lock in the gains and stick with your exit rules.
Here are 5 highly ranked PowerRatings names that are poised for outsized short term gains:
^GLBC^
^TUES^
^ROY^
^FUN^
^AMCN^
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David Goodboy is Vice President of Business Development for a New York City based multi-strategy fund.