Friday, February 04, 2005

Selling On The Way Up

An old friend of mine is just getting into the stock market after primarily being involved in real estate. Over the past week we have spoken a number of times about the market and trading. I told Brandon how one of the toughest things to do in stocks is to sell on the way up!

Stephen Covey wrote a book which was widely read called "The 7 Habits of Highly Effective People." The second habit he discusses is to Begin With The End In Mind. For trading, I equate this habit with planning my exit. If I am to be an effective trader (make a habit of profitable transactions), then it is necessary to know what elements would cause me to exit the trade. Regardless of which reasons you may set for exiting a given trade, once a profit target has been met, being disciplined means taking that profit. Sometimes this means a profit target is met exceptionally soon. It might also mean sustained strength in a position which would cause you to only exit most of your shares upon your profit target being met. The point is, you are selling into strength.

I told Brandon how easy it is to play "what if" as a trader. What if I had kept my entire position? What if I had been out of town or lost my quote feed and had no choice but to stay in? What if I had really been aggressive on that trade? These two words will bother you if you let them, but that may or may not positively affect your trading results. Be careful when playing what if! Psychological capital is of great importance. Preserve it!

My friend Steven says that "missed money is better than lost money." He is right. Let's take a look at the 2 scenarios which can play out when selling on the way up.

Last November I listed BOOM as a buy in my swing trading newsletter at $11.80. This stock rocketed higher over the following 2 days to the tune of 49%. This kind of move would have met most anybody’s profit objective in such a short time. Readers inquired when and where to take profits, and I mentioned how I sold into the strength while the party was in full swing as another friend Adrian would say. It was a good move.

Chart courtesy of TCNet from Worden Brothers, Inc. Posted by Hello

BOOM finished well off its highs that day and just a short time later BOOM had returned to its prior price level.

Chart courtesy of TCNet from Worden Brothers, Inc. Posted by Hello

They don’t all turn out that well, though, which of course is why I am writing this post! MSO was a long candidate in my swing trading newsletter which triggered just 9 sessions ago with a buy point of $29.00. I have been trading less aggressively during the earnings season, and therefore have been prone to taking profits more quickly. MSO worked nicely for a few days but then started to struggle two days ago. It appeared the party was over for this stock. Selling into that strength was a prudent thing to do. But, this stock jumped another 10% in the past 2 days since then, without me! Another opportunity to play “what if!”

Chart courtesy of TCNet from Worden Brothers, Inc. Posted by Hello

The point of my post is this: follow your game plan! If your trades hit your stops or your profit targets, follow your plan and get out, even if it means selling most or all of your position into strength. Yes, you will have the chance to play what if. Yes, it will be frustrating to see stocks sometimes go higher without you. But you will be practicing discipline, and discipline will likely make you many more dollars in the future than you will be able to make without it!

Good night, and enjoy your weekend!

The Stock Bandit


Anonymous Anonymous said...

Love your site and blog. I'm wondering if it is possible to have as one of your future blogs a description of a typical trading day for you: your trading setup; how actively you trade; whether you belong to a trading chat room or go solo; whether you stick around for earnings news, etc. Thanks and keep up the great work.

5:41 AM  

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