Wednesday, December 31, 2014

A lesson from the past - letting profits run

Last night, myself and another trend following trader were keeping ourselves amused by observing a trading thread relating to a US stock which had shot up on some positive news. The chart of the stock in question is below:

At one point late in the day the stock was up over 200%. The comments on this thread, were full of predictions and smart traders:

"Looks toppy to me"
"It will go to about $20 before plummeting"
"Looks overbought - will sell now and buy back at a lower price" etc., etc.

Now, all those comments were from people trying to time the perfect entry or exit, or making predictions or opinions about what would happen. I guess some of these people will be able to time their entries and exits in this manner. The majority however will not be able to do it, and will end up losing money as a result.

Now, I will say that, with forums in general, if it difficult, if not impossible, to know another traders' preferred holding period, timeframe, basic method etc.

However, if you are like me, its far better to keep things simple.

If I were to be holding a position in this trade, my own view can easily be summarised:

The trend appears to be up. Therefore, you should hold until the trend has ended.

This reminded me of a previous trade where I was reminded of holding on until the trend had ended.

Back in 2009, I took a position in a US stock that is no longer around - Human Genome Sciences (it was bought out by GlaxoSmithkline in 2012). After I got in, it experienced a similar violent move up to about the $14 area. Seeing it as a windfall profit, and trying to be smart, I closed the trade.

Big mistake. I felt great for about a day or two. The trend ultimately carried on until it got above the $30 level.

With hindsight, the best/worst thing I could have done was to take partial profits, on the basis that the open risk had significantly expanded (what I call the Uniform Risk Exit). But either way, I should have kept at the minimum a proportion of the trade open.

That expensive lesson just reinforced the need to let profits run.

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