When do you sell a winning trade?
Think about this for a moment. Your answer could say a lot about your odds of success.
People often tell me you never go broke taking a profit. These people like the certainty of a quick gain. They say it’s better to sell early than risk a lower price tomorrow.
But what if prices eventually go a lot higher?
I’ve seen many traders come and go over the years. One of the biggest reasons they fail is a poor exit strategy. Their mistake often comes down to cutting profitable trades too early.
This week I’m going to give you an insight into how I trade. You’ll see a stock from my own portfolio. It will help you understand why I believe running your winners is so important.
But first, have a read of this email…
‘Having traded with Quant since earlier this year I am still a bit vague about profit taking. From reading all your articles, it seems to me you only sell when your stock hits its exit stop (having let a winner run).
‘Please confirm that I am correct because I sometimes look at a trade that is up a reasonable amount and ask myself if I should be taking the profit.
‘A good example is the recent exit from Altium [ASX:ALU]. I entered at $7.48 and the stock rose to a high of $9.97 in early September. The shares then slid back to their exit stop and I missed the opportunity.
‘I know your answer will be stick to the system. But I just want to understand that I am doing this the right way.’
Nigel describes a classic situation. Should you cash in an early gain or let it run?
Let’s have a look at the stock in question…
This is the price chart for Altium [ASX:ALU]. You can see Nigel’s entry and exit points. The trade got off to a good start, but then fell back. Nigel gave back most of his early profit.
Did he miss an opportunity?
I don’t think so.
You see, Quant Trader isn’t targeting a quick profit. The strategy is to stay with the trend until the trailing stop is hit. That’s how the system maximises profits.
No, ALU’s trend didn’t get too far. That’s the nature of the game. Some trades will fall short of their potential. But the rewards from those that do run can be great.
This is what I do
OK, let’s move on to my trade.
Have a look at this chart…
Click to enlarge
There’s a good chance you’ll know this stock. It’s online travel provider Webjet [ASX:WEB]. The stock was also a successful Quant Trader signal.
WEB came to my attention when my system gave a buy signal. The shares were at a two-year high, and up almost 100% in 15 months. I bought a stake at $4.45 on 1 October 2015.
Many people don’t like buying after a strong move. They reason that a stock must be nearing the end of its run. Their overriding concern is to avoid buying at the top.
But this is often a mistake.
You see, strength is positive. It’s a good indicator that a trend will continue…and some trends continue for a very long time.
Here’s the next chart…
Click to enlarge
Buying into strength was a good call. WEB quickly ran higher. My shares were up 31% in under 10 weeks — it was a terrific start to the trade.
Now, this is where many traders struggle. They know they should hold. But the lure of a quick profit is often irresistible. They also fear an approaching correction will rob them of their gains.
Think how you’d handle this trade. Would you cash in your chips, or let it ride?
I’ll tell you what I did: I let the stock run.
Letting a trade run involves taking a risk. It means accepting the possibility that an early gain vanishes — as was the case with ALU. The 100%-plus winners are the reward for that risk.
This is what happened next…
Click to enlarge
WEB fell 23% over the next two months — most of my paper profit went up in smoke. Nigel had much the same experience with ALU.
So, was missing the chance to take profit a mistake?
Not at all. Holding was the right decision for this type of strategy — even if the trade was a washout. You can’t stay on a medium-term trend unless you let your winners run.
My stop-loss on WEB was at $4.41 (just below my entry point at $4.45). I was ready to give back a respectable gain for the chance of a much bigger one.
You see, much of my trading profit comes from stocks that run a long way. Banking an early profit caps this potential. That’s why I let my winning trades run.
Staying the course
It turns out the fall in WEB was just a correction.
Here’s the final chart in the series…
Click to enlarge
The early selloff was just a blip in a bigger upward move. There were other corrections along the way. But I was able to stay with the trend until just recently.
This profit would not have been possible if I’d cashed in early.
Holding is easy in hindsight. The corrections seem to get lost in the bigger advance. But real-time is different. You simply don’t know if you’re holding an ALU or a WEB.
I find it helps not to watch each stock too closely. Riding every movement can be emotionally draining. It can pay to take a step back from the coalface. Not having WEB at top-of-mind made it easier. I was able to sit through the corrections without worrying. My trailing stop was in place. I just let the market do its thing.
WEB hit a record high of $12.20 in October. The shares then fell sharply in early November. This was the trigger for my exit stop at $9.15.
No, I didn’t get out at the high — and that’s OK. My aim is to get the big middle part of a trend. I almost always give back some profit at the end. That’s the cost of using a trailing stop.
WEB rose by 106% from my original entry. There were also dividends along the way. My willingness to give back an early profit was the key. I couldn’t have got this far if I sold for a 20–30% gain.
No one knows how high a stock will rise. Some trends do little, while others do a lot. But I do know this: Letting your profits run increases the odds of banking a triple-digit winner.
Until next week,
For Markets and Money
Editor’s note: Having an exit strategy is one of the most important decisions you’ll make. Yet, despite its importance, selling is an afterthought for many traders. This can be a costly mistake.
Quant Trader uses a trailing stop to manage selling. The trailing stop is an exit level that follows a share price higher. It won’t get you out at the top — that’s not how it works. The aim is to capture the big, middle part of a trend. This is how the system captures gains like 353% in Blackmores [ASX:BKL], 199% in Vita Group [ASX:VTG], and 147% in HUB24 [ASX:HUB].
So, if you’re not sure when to sell…I strongly suggest you look into Quant Trader now.
Try it. See if it makes sense to you. It could change the way you trade forever.
From the Archives…
Don’t let your biases control your thinking. Look objectively to what the market is saying. The great Richard Russell (rest in peace) had a 60-year career writing about financial markets. One of his most common phrases was ‘follow the money’. It’s the best advice you can get. Money isn’t biased. It’s amoral. It goes where returns are the highest. Don’t ignore that advice. Following the money tells you that global markets are bullish as we head into 2017.
If you’re looking for a repeat panic in early 2017, you’re likely to be disappointed. Markets don’t work like that. The same record never plays twice. It’s always a remix. A different version of the same song…
In other words, this rally could surprise nearly everyone and keep on going.
Call it whatever you like, but something tells me that before 2020 (possibly as soon as next year), this bubble we’re living in — unaffordable entitlement promises; asset prices that bear no reality to underlying income; governments being paid (via negative rates) to issue bonds; corporate and public sector pension plans that are woefully underfunded; and deficit spending as far as the eye can see — is about to meet a pin.
China is trying to liberalise its capital account by allowing the free flow of capital but, in doing so, it’s losing control of its currency. So it has to sell foreign exchange reserves to defend the currency. But there is no action without a reaction. Falling foreign exchange reserves represent a tightening of liquidity. So the more these reserves fall, the more difficult it will be for China to create the credit needed to meet its growth targets! Confused? Don’t be. Just follow the money.
If China’s Economy Is So Strong, Why Is Capital Fleeing?
By Greg Canavan | 12 December, 2016
One consequence of China’s rebound is that it has been accompanied by increasing capital flight. That is, more and more capital is trying to get out of the country, and officials are losing the battle in trying to control these capital flows. This puts pressure on the yuan, which is now at its lowest point against the US dollar in eight years. The Financial Times reports that the yuan is on track for its worst fall on record this year.