Sunday, May 26, 2013

Keep hold of those profitable trends

When you get into a position where a trend develops, you need to avoid the temptation to take your profits too early, for fear of losing them. This should be the case even if the trades you are in are trending the opposite direction to the general market. This can be quite tricky from the psychological point of view, but they do present an opportunity to make decent profits.

The charts below show some stocks that have trended downwards, despite the general market moving in the opposite direction over the early part of 2013. It so happens that these are all in the same sector, which may give you a further clue as to which areas of the market are showing general strength or weakness. To give a historical context, this was especially apparent in the second half of 2007 in the banking sector, and we all know what happened next.

As I've mentioned before, there are a couple of reasons why I recommend having a small element of your portfolio with these trades in. One, they offer a possible hedge against your other trades, should the market switch direction. Two, when a stock exhibits a high degree of relative weakness (or in the case in a stock moving up when the markets are moving down, a high degree of relative strength), these trades can lead to these types of trends. It is not always possible to find a good set up for these trades, but you should never be blinkered and look for new positions solely in one direction.

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