Thursday, July 25, 2013

Stick or twist?

Given the strong recent performance, the sight of the markets and individual stocks being in the red for one day has come as a bit of a shock for some. Some people may be wondering about exiting their long positions now, to bank a 'safe' profit. I've taken the wording below from a post back in 2011, which may be very relevant at the moment:

"The danger now is what to do next. Depending on their chosen timeframe, hardened trend followers will simply sit 'on their hands' and do nothing with their existing positions except update their stops in accordance with their rules. Other traders will be cashing in on their profits on the view that the markets are overbought, and don't wish to lose some of their profits - a classic example of cutting your profits short.

I've referred before to the story of Old Partridge made famous in Reminiscences of a Stock Operator, and this springs to mind again after such a day as today. Yes, you can cash in your profits, but then you've lost your position. How will you feel if you exited the market on a small reaction, only for prices to quickly resume their march upward?

Prices may go up, they may go down, but statistically the odds remain in favour of the uptrend remaining intact. Prices can fall from their current levels and not change this - its only if the trend changes, as determined by your system rules, that trend followers will be exiting their positions (and when that is cannot be predicted).

So, if you are attempting to follow the trend, resolve to carry on holding your positions until that point is reached."

If you are still uneasy with the concept of letting your profits run, an alternative approach may be not to close your existing positions, but to reduce your open risk. I talk about this further here, as well as in my e-book.

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