This Week’s Battle Plan

Well, yesterday was the opening day for my daughter’s softball team
and the first game of me being an assistant coach for Coach Mike. As
luck would have it, we had to face the best pitcher in the league and
Coach Mike was very concerned. But, he shouldn’t have been. He had the
girls ready. And by the second inning this was very obvious. Our
hitters teed off on this girl, batter after batter. We won easily. So
easily, that Coach Mike was actually smiling at the end of the
game, something few have seen him do before. And from the way the
girls played, I suspect he may smile at least few times more before
the end of the season. But as exciting as all this was, it was topped
off by the actions of two mothers from another team. During the game,
these two women had a not-so-small argument, and before you knew it,
they were nearly going at it! This was better than being at a World
Wrestling Entertainment event!

Wow! And this was only opening day. I can’t wait until next week’s
game. How I do love kids sports!

Locking In Profits This Past Week

I’ve spent a lot of time discussing the pros and cons of locking in
profits versus letting gains run. In this market, meaning a news-driven
bear market, I strongly feel you need to be even more vigilant in
locking in your gains. This is not only true for short-term traders
but it’s also true for the day traders. Let’s look at examples of each
from this past week.

The question here is: what do you do? Well, you could add to your
short positions, which in my opinion is very wrong, you you could stay
short and hope for bigger gains which may or may not have been wrong,
or you could have started locking some gains, which I feel is the
correct move here. Why? First, you have some gains and depending upon
how aggressive you were, the gains were probably good. Second, we are
living in a news-event driven market and should good news come out,
those gains would likely be eliminated by Wednesday morning. Therefore,
locking in some profits and getting the rest of your positions to
breakeven or better is the most prudent move here.

Wednesday the market sold off further early before reversing. What do
you do? My opinion is you lock more profits in and reduce your risk
further. And by Thursday, your position size is now even less, as is
your risk, and you were further rewarded again as we sold off another
102 points. By this time, meaning by Thursday’s close, YOU SHOULD BE
LOCKING ALL YOUR PROFITS IN. The gains have been made, the market has
sold off aggressively two out of the three days, you were smart enough
to be short and there is no reason to be screwing around. Yes, the
overwhelming urge is to stay short in anticipation of some negative
news event that will take us lower. And should war have broken out on
Thursday night you would have been further rewarded had you bet on
this event occurring. But that’s not trading, that’s gambling! The
market was no longer overbought. The proper move was to lock your
profits in and wait for the next opportunity. You have the gains, make
sure you lock them in!

Day Traders Scenario; Friday

Now, let’s look at the same scenario and opportunities for day
traders. Thursday brought the market to a short-term over sold
condition. Friday morning’s opening was weak and we became even more
oversold. I’m going to assume you were a buyer off this weakness and
I’m going to assume you got in a few minutes before the “they
captured Osama’s sons” rumor hit the floor (I know a number of TM
members were long because some of the entry strategies that have been
taught triggered these signals).

At a little past 10 am, we all looked very smart (in this case, it was
“better to be lucky than smart”) as the rumor of the capture
triggered a 13-point move in the S&P’s within 5 minutes. It was a
13-point 5-minute bar, something that rarely happens! What is the
proper move here? Again, you could hope for a further move and sit on
your hands. But, in my opinion again, it is far better to take at
least 50-75% of your position off the table and AGGRESSIVELY move your
stops higher. Yes, we may rally more, but that’s why we keep a piece
of the position. The rest of the position (meaning a large piece of
it) should be “banked.” This is smart trading. It’s taking
your gains, moving up your stops and on the rest and letting price
dictate action from here. Should we come back down, your stop will be
hit and your remaining gains will be taken. If we rally further,
you’ll lock in more profits and trail your stops higher on your final
piece. This should be an automatic thought process. You do this over
and over again when these situations arise.

More

As you have just seen, it doesn’t matter if you day trade or short-term
trade. The exit strategies are the same. You have an initial
protective stop which you place IMMEDIATELY upon being filled. If
price moves in the direction your signals predicted it would move, you
start locking in profits and get yourself to breakeven as quickly as
possible. And, if the move is substantial, your profit taking becomes
even more aggressive. No need to hope for a home run on the trade. Take
your gains as they occur and piece out your position as the move
unfolds. When you learn to do this automatically, it makes trading
less chaotic and it makes weeks like this one much more enjoyable and
much more profitable.