Are You Making This Common Trading Mistake?

Imagine the scene…

A sprawling room full of traders. Some standing with a phone pressed against their ear. Others pointing at flashing dealing screens. The room is full of activity and noise.

Then, above all the commotion, you hear…

Whoo! I just bagged the elephant!

Clenching his fist, a young man rises to his feet and high-fives a colleague.

You may recognise the scene. It’s from the 1980s movie Wall Street. The film may be fictional, but it captures the look and feel of the dealing room perfectly. It’s a setting I remember well.

The previous quote is from up-and-coming broker Bud Fox (played by Charlie Sheen). You see, Bud had just landed his biggest ever client — the infamous Gordon Gekko.

This was Bud’s big break. Every broker dreams of catching the big one, but few ever do.

So, how did Bud ‘bag the elephant’?

It came down to two things: persistence, and a good idea. These are key ingredients to just about every success story — no matter what the challenge.

In a moment, I’ll show you how to bag the elephant. I won’t be talking about winning a Gekko-style client. No. I’ll be telling you how to land a potential triple-digit stock gain.

Wrong end of the stick

Many people believe it takes expert financial analysis to make big profits.

Others say you need a whiz-bang technical indicator…a secret formula that can identify turning points and get you in at the bottom.

But, you know what? They’re wrong.

You see, both of these methods centre on when to buy — this is where many traders focus their attention. They believe the entry point is the most important part of the trade.

Sure, entries matter. But they’re not the most critical factor.

Your selling strategy is the key to bagging the elephant.

This has the greatest impact on your trading results. Selling is the swing factor that separates the best traders from the pack.

I talk a lot about letting winners run and cutting losers. It’s a simple concept: Resist the urge to sell a profitable trade, and don’t hesitate to exit a losing trade.

Of course, this is harder than it sounds.

For many, the opposite comes more naturally. They sell their winners early, and let their losers run.

And the research supports this.

One study examined 78,000 accounts at a US discount broker. It found that, between 1991 and 1996, traders were 1.8 times more likely to sell a stock that was up 20%, versus one that was down 20%.

Another study using data from 10,000 accounts between 1987 and 1993 backs this up. It found traders lock in profits at a 50% greater rate than losses.

Then there’s a study on 4,330 accounts at an Israeli brokerage. It found the holding period for losing trades was roughly double that of winning trades.

Local researchers had similar findings. They looked at trading volume after a company listing. It turns out volume was lighter when the shares opened below the offering price — people were hesitant to sell at a loss.

I could go on, but you get the point. Many people sell their winners relatively quickly, while clinging to their worst performers. This is a key reason why they don’t get the triple-digit winners.

Bagging the elephant

So how do you make the big profits?

Well, I’m going to show you. The stock you’re about to see is one of Quant Trader’s live signals. It’s an example of how the system trades a big trend. I trade this way myself.

Check this out…


Source: Quant Trader
[Click to enlarge]

You’re looking at the share-price chart for Vita Group Ltd [ASX:VTG]. The company is a mobile-phone retailer, and operates under the Fone Zone banner.

VTG is a pin-up stock for trend following. It shows why Quant Trader doesn’t take profits. The strategy is about letting profitable trades run as long as possible.

The first buy signal was at $1.28 on 16 December 2014. There were two subsequent signals at $1.42 and $1.76. The eventual sell signal was at $3.83 — the respective gains are 199%, 169% and 117%.

Yes, the entry points were good. But that alone isn’t enough. The key to catching big trends comes down to one thing — resisting the urge to grab a quick profit.

Ask yourself this: Have you ever taken a quick 20% gain?

I know I have. A quick-fire profit can be hard to turn down.

But, you know what?

Traders who take small gains never get a Vita Group. It’s impossible. They sell every winner before the shares can really get going.

A reason I often hear for selling winning trades early is fear. People worry about giving back their profits. And I understand this — it’s no fun watching a profit whittle away.

But here’s the thing: You have to risk losing a small profit to potentially get a larger one. There’s no way around this. The rewards for accepting this risk are the trades like VTG.

Quant Trader uses a trailing stop to exit a trade. You can see it on Vita Group’s chart. It’s the dotted red line below the share price.

A trailing stop won’t get you out at the high. But it does the next best thing — it helps keep you in a trade for longer. This is how you could boost the odds of bagging the ‘big one’.

I’ll tell you more about trailing stops next week. You’ll see why they’re such a crucial part of my trading strategy, and why I believe they should be part of yours as well.

Until next week,

Jason McIntosh,
For Markets & Money

Editor’s Note: Deciding on 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. This 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 Ltd [ASX:BKL], 199% in Vita Group Ltd [ASX:VTG] and 147% in HUB24 Ltd [ASX:HUB].

So, if you’re not sure when to sell, I strongly suggest you check out Quant Trader.

Try it. See if it makes sense to you. It could change the way you trade forever.


Jason is a professional quantitative analyst. Before he graduated in 1991 he joined Bankers Trust — a Wall Street investment bank — to be a trader. After Bankers Trust was taken over in 1999, Jason, already financially independent, co-founded a stock market advisory and funds management business called Fat Prophets. At 37 he sold his part of that business and retired. These days, he’s a private trader and system developer. In 2014 he launched the wildly successful trading service: Quant Trader.


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