When Should One Take A Profit

M

mgregor

I have been debating an issue for the past several days. I like to trade 100-300 shares of stocks like CHKP, CIEN, CMVT, JNPR, etc. I usually place my stop loss order about $1 to $1.50 away from established support/resistance levels.

I've notice that in today's choppy markets, it is reasonable to expect to get a profit of $3 on any given position, and that by waiting for more, you'll usually lose some or all of your profit.

I'm wondering if I should be buying my entire lot of 300 shares upfront, or maybe 100 shares to begin with and then the rest if the position shows me some profit? The problem I have with this, is that by waiting for confirmation, I'm getting filled farther away from my logical stop loss point.

So, what I've done lately is buy the entire 300 shares, then sell 200 shares at a $1 profit and leave the remaining 100 shares for a profit of $3. The problem with this of course, is that it ruins my reward/risk ratio from 3:1 to 1.6:1

But then again, I've noticed that even if I'm wrong on being able to get a $3 gain, I'm usually able to at least take $200 out of the market on my initial sale of the 200 shares. Then I either sell the remaining 100 shares at the close, or at a loss if my stop loss is activated, in which case I would still have a profit of $100, minus commissions.

So what do you more experienced traders have to say? Should I keep doing what I am now, or should I just keep the entire 300 shares for the $3 gain?

When do you guys decide to take some profit out of a trade, in general?

I'm just tired of being ahead by $1 to $2, then being shaken out of my position just before the big move, only to lose my capital. I figure if I can get a $1 profit on 200 shares twice a day, that's still $400/day. Not a bad income. Then I still have the potential for another $300 profit on my remaining 100 shares.

Thanks in advance for your input!
 
Mrgregor, I take a portion of the profits off the table as soon as the market makes it available to me. I do this without any reservation or hesitation. I have found that the set-ups I use a very large % of the time move immediately in my direction, now there is no way of "knowing" the market will continue to follow thru or reverse and take my stop out. For this reason I take 1/2's 1/3's or 1/4's of my position off the table as soon as the market presents me with a reasonable 1-3 R-gain. I then trail the remainder of the position with a variety of trailing techniques I have developed. This action makes me a much much much more consistent winner and makes the trades much less stressful and ultimately easier to manage in an objective manner because in most cases the trade becomes a risk free oppurtunity to catch a very large R-Multiple. Im less likely to make an emotional or pscycological mistake if I know that the trade is "risk free". Now it is important to note that when I enter a trade it is with the anticipation of making @ least 3 times what I risk with the potential to make more. If your set-up only provides you with the potential to make 3 times than this may not be an effective technique for you.......

Good Luck and PEACE ......... COMMISSO
 
Commisso,

First, thanks for your input. I follow Tony Oz's strategies of support/resistance lines.

It's not really that my setup only allows for a $3 gain. That's just a number that I determined was a reasonable and realistic maximum intra-day gain to expect in today's choppy markets.

Yesterday, for example, I shorted 300 shares of CHKP at 72 9/16, 7/16's away from established resistance at 73. I bough back 200 shares when the stock dropped to 71 9/16, and bought back the remaining 100 shares at 69 9/16, for a total profit of $500, less commissions.

Now, the rest of the day, the stocked dropped down all the way to 63 1/16. Of course, looking back, I wish I had shorted 10,000 shares and bought them back at that low of the day, but that's NOT a realistic plan.

I was rather nervous at the start of the trade because the futures were up sharply pre-market. Also, CHKP went all the way up to 72 1/4 in pre-market trading. I really thought resistance might be broken. Luckily, my analysis turned out correct.

What bothers me about this strategy of taking profits off the table at first chance, is that in the end it ruins your reward/risk ratio.

If you're correct 50% of the time and just keep your positions until getting stopped out, or until your profit objective is met, than every winner will erase 3 losses (without computing commissions).

On the other hand, if I take some profit at $1, then that will increase my chances of not having a losing trade, because it's a heck of a lot easier to be right for a $1 gain, than a $3 + gain.

I suppose when the market turns into a trending bull market, that I'll have to give my positions more time to grow into multiple point gainers, but until then I think I'm gonna keep hitting the cash register early.

 
Let me ask you a question????
When you locked in 200$ worth of gains after only risking 150$ why did you lock in the other 100 simply because it hit your PRELIMINARY target of $3 a share. The 15 mins showed no signs of strength whatsoever and you now had a risk free shot @ catching a huge gain.......Wouldn't it have been wiser to simply trail the stock all the way down...

And one other thing I do not take the majority off, I take 1/3's, 1/4's and sometimes 1/2's.... u took 2/3's

Say I was in chkp yesterday...after looking at the chart if i sold short where u did I would have taken 100 (1/3) off as soon as it traded over a prior bar on the 5's (after I got at least 1 1/2 times what I risked)which would have been 69 1/8 which would have more than given u 2 times what you risked and then I would have let the stock bounce and place a stop for the other 200 a 1/4 above the latest swing high which would have been 70 3/4... and then continued to trail the rest with whichever technique I felt fit the trade and the action the best. After the stock closed so weak it now looks as if it would test the latest lows @ 59-57 level.....I would have closed 1/3 out @ the close in order to minimize my overnight exposure and carried the other 100 over in expectation of the downward pressure following thru.

So now you closed 100 out for a gain of around 3 1/4
100 out for a gain of 9 and still have the other 100 open

thats 1225$ locked with another 9 open! and considering you were only risking a half pt. on the trade or 150$ that is a serious R-gain for a 1 day trade........
which would pay for 15 of the same 150$ trades! as you like to look at it. It is alright to have a target of 3-1 on the macro view of your system, but when your in a trade (micro view) do not let that 3-1 take you out. You were afraid of losing profits and it got u out before the chart ever said to.

Hope this explains better what I meant in my previous post.
 
Commisso,

I was a bit confused by your original post. I thought you meant that you take profits at 1/2 and 1/4 points, but you meant you liquidate that portion of your position when you're in a profitable situation. I understand that better now.

I do not risk 1/2 a point on my trades. Usually, I'll risk $1 to $1.50, depending on where support/resistance levels are.

Reading your post, I must say, that would have been a damn good strategy!

You mentioned that you use other types of trailing stops, how exactly do you decide which one is appropriate. I've heard of the one's you mentioned above before, just didn't think they were as appropriate for day traders, as they are for multi-day swing traders.

That's because I never bothered to wait until the position was profitable by at least 1 1/2 times my risk. I would just look at a 5 min chart and trail my position with a break above the previous bar's high. That usually gets you out at a loss in the beginning. I never thought to let it turn profitable before using a trailing stop.

Would you share some other types of stops that you like to use? Are there any good books on risk management that you would recommend?

Thanks again for your help!
 
mgregor,

The way I personally trade (which follows Tony's strategy) is that I have a price target at which point I sell half or part of my position. The rest I let ride with a trailing stop. So in your case with CHKP, assuming it didn't do a big wiggle back up and/or your trailing stop wasn't too tight, you could have let 100 or 150 shares ride all the way down to the low of the day and lock that in as well as the profits you took at your first price target. Also, what was your reasoning behind taking your first profits where you did? Were you stopped out on a reversal, or did you just arbitrarily decide to take some profits with a 1 point gain? You might be better off snuggling your stop a bit tighter for half the position once the trade has a 1 point profit and continue to let it develop toward your price target. If your price target is hit, sell half the position and let the rest ride with a little more liberal stop to allow more wiggle room and a better chance of staying in the trade to allow maximum profit.
 
Zboy,

My original $1 gain was just a number at which I decided to dump 2/3's of my position, in order to lock in some profit and reduce my position size (risk). Not only that, but futures were up at the time I got in the trade, and that made me nervous.

The remaining 100 shares were sold when I was $3 in the money because I honestly didn't expect the stock to move much more than $3 in a single day. My current strategy entails closing all my positions at close, due to the choppy market were in.

Also, I trade with MB Trading, and if I hold a position overnight, then I can't trade that same stock the next day, after I liquidate my position. Because I only follow 7 stocks right now, that would reduce my potential tradable stocks to only 6.

I was also hoping to go long in that stock (CHKP), should it bounce at support levels of 61 1/4 to 57.

Looking back now, maybe I should reconsider that strategy. I guess it wouldn't hurt to carry 100 shares overnight for a big profit potential.
 
mgregor,

I wasn't necessarily advocating taking positions home overnight. In your CHKP example, you mentioned that the stock hit a low around 63 during the day that you entered the trade. What I was referring to was the idea of simply trailing a liberal stop, and if you haven't been stopped out, closing out your position at the end of the day and take your profits home, which as you mentioned in this kind of market is a good idea.

Now, certainly no one ever went broke taking profits, but it seems to me that your methodology of closing your positions is more of an arbitrary thing rather than stop management, and as a result puts a bit of a cap on your profit potentials for those trades. I think it is smart to sell part of a position and lock in profits, but it seems from the info you provided that you closed out the remainder of your position simply because of your expectations of what you thought the stock was capable of doing, rather than managing the trade based upon what the stock actually did. This is where good trailing stop management can help to protect your profits while at the same time maximize them.
 
Stevene9,

As far as I know, all Direct Access Brokers' clients are classified as "Pattern Day Trading Accounts", and as such are subject to special rules (discrimination) by the S.E.C.

Basically, if you buy a stock today, hold it overnight and sell it the next day, if you trade that same stock again, you'll get a trading call, which is a type of margin call.

This is because the money from the original stock you sold is not released for 24 hours, or something like that.

Pretty stupid and discriminatory rule, since you can buy and sell anything, anytime with other non DAET brokers such as Datek Online.

 
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