This technique can help you lock in big gains
In a day and a half the market has
gone from the cusp of breaking down to the cusp of breaking out. The
two most significant changes from the action I reported in last week’s report
are that breadth has increased dramatically, and there has been some
accumulative action. It’s still too early to get real excited about this one.
I’m in wait and see mode. If breakouts are your game, take them as they occur,
but remain extra diligent.
Today I will conclude my series on profit-taking by discussing
how traders can adjust their strategies according to market conditions. For
those of you that missed my previous three articles on this topic (Dec
7th,
12th and
14th), you may want to go back and read them.
As a quick review, I established that although we would all
like to be able to sell at the top (or cover at the bottom), it is impossible to
design a profit taking methodology that consistently does this. Therefore,
profit-taking strategies fall into two categories:
1) Those that look to sell too early.
2) Those that look to sell too late.
There are pros and cons to each type of strategy. Once
understood, the vast majority of traders will find they are most comfortable
with a combination strategy. A combination strategy allows them to sell a part
of the position on the way up (too early), and the rest of the position on the
way down (too late). They may therefore reap the rewards of both strategies.
I’ve always been of the opinion that market analysis, even
when correct, does the average trader very little good. Part of the reason for
this is that most traders don’t understand how they should adjust their trading
based on market conditions.
I’ve said in the past that I believe a trader should take the
trades that meet his criteria, regardless of his (or her) market opinion. When
they perceive market conditions to be unfavorable to their style of trading then
additional steps should be taken to help protect against losses. These steps
include demanding the best setups, trading reduced position size, and adjusting
stops.
Lets look at how stops may be adjusted based on market
conditions in the context of the profit-taking strategies we’ve been discussing.
For a trader that typically uses a mix of say 50% “too earlyâ€
and 50% “too late†for their profit-taking strategy, they should increase or
decrease these percentages as their perception of the market dictates. If you
are being stopped out of a lot of trades and seeing many of your winners turn
into scratches, and your perception of the market is that it is currently
unfavorable to your strategies, then you could consider taking a larger
percentage of the trade off “too earlyâ€. Perhaps 75%-25%. In favorable market
conditions you could do the reverse — take profits on 25% “too early†and 75%
“too lateâ€. (Percentages are just for example. You should use whatever
percentages you feel most comfortable with.)
By making minor adjustments such as these you will allow
yourself more opportunity for large gains when market conditions are favorable,
and will be better positioned to control drawdown and do some quick
profit-taking when conditions are unfavorable.
Good trading,
Rob
For those who may be looking to expand their
knowledge beyond just market timing, my
Hanna ETF Money Flow System utilizes the VIX in generating trading
signals for spread trades.
Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.