Here’s Some Simple Advice For You
I don’t know whether we’ve already
started a new bull market, or whether the selloff will begin tomorrow
and take us to new lows. What I do know is that the market is experiencing the
best rally it has seen since the 2000 top. The are larger numbers of stocks that
have broken out of bases and racked up significant gains than I have seen in
years. More intermediate-term breakouts seem to be emerging daily, and the
success rate of these breakouts is far better than it has been in a long time.
If you’re a growth investor, or a momentum trader, you’ve probably made more
money in the last few months than you did in the four or five months leading up
to that. Sounds wonderful, but…
Traders have to deal with something that doesn’t exist in many other professions
— winner’s anxiety. If you own a bunch of great stocks, and you bought them at
the perfect time, and you’ve got big gains in them, you should be really
happy…right? Not most traders. Most traders have heard people talk about how
the biggest losses always come after the biggest gains. Most traders have
experienced big losses after big gains. Most traders are superstitious. “If I
don’t talk about stock XYZ maybe it won’t go down. Every time I open my big
mouth and tell someone how well I’m doing in a stock, it turns tail and stops me
out within a few days.â€Â Finally, most traders get really antsy when they have
large unrealized gains, and their stop is still far away.
It’s wonderful when a stock you just bought goes on a terrific run, but many
times the joy of seeing a trade work out is quickly replaced with the worry of
when to sell. “The stock can’t go up forever. It’s bound to pull back. What
if it comes all the way back to my stop? I’ve got so much in profits. I’d just
die if I ended up giving them all back. Maybe I should sell now and just take
my gain. But I’m doing so well. What if the move is only half over…or worse…a
quarter? This could be the best trade I’ve had all year and it’s killing me
thinking about it.â€
This kind of conflicted thinking is perfectly normal, and it’s something that
all traders deal with at one time or another (assuming they occasionally have
winning trades). For most traders, it’s also as difficult to deal with as the
anxiety of losing. Fortunately, the cure is less expensive. Most every trader
has as part of their trading plan contingencies for dealing with losing trades.Â
How much are you willing to risk? Where does the initial stop loss go? To
relieve winner’s anxiety, you simply need to have a plan for handling your home
run trades as well. The simplest and most effective mechanism I’ve found for
handling them is taking partial profits. Once you take that first piece off the
table, whether it be 1/3 of the position, ½ the position, or any fraction you
deem appropriate, you will feel a huge weight lifted off your shoulders. Now
you can root for the rest of the position without having to worry about losing
all of your gains.
There are many different ways to take partial profits, and you can experiment to
see what works best for you. You can sell as soon as a stock moves up by a
certain dollar amount, or percentage amount. You can tighten stops to one or
two bars beneath the current bar if you are in a runaway move. You can look for
reversal triggers like Kevin Haggerty or Derrik Hobbs use for entering trades.Â
The methodology you use doesn’t matter. You’re never going to sell at the top
tick anyway. What matters is that you keep some profits and you keep some
sanity.
The major indices put in another solid day of accumulation. The pullback
everyone (including myself) keeps warning about hasn’t materialized yet. It
might start tomorrow or three weeks from now. I don’t know. But if you’re long
and you’re that worried about it, I have a suggestion for you…
Good trading and good weekend,
Â
Rob Hanna