One cool thing about the world in general is the wide range of thinking on just about any topic. This reality makes for both interesting discussion and heated debate, which is fine, but in some specific situations, it can create confusion. I have discussed before because some have indicated confusion around it. Let me see if I can clarify today.
There is a striking inability to stay with winners. Most traders are too willing to take small profits and, therefore, miss out on big profits.
Once again, we are back to the maxim, “Cut your losses and let your winners run.” I understand how this can be confusing, especially when I give advice to take your profit and move on to another trade. This advice is directed mostly toward novice traders, as taking profit, any profit, is a confidence builder, and all traders, novice or otherwise, need confidence.
I also understand how difficult it is to “let your winners run.” You see, one has to make a decision as to where the stop goes, or if you put a stop in at all. A trader is faced with deciding how much profit to sacrifice when putting in a stop. Is it 1, 2, 3, or 5 percent? If you sell when you have hit your profit target, you get all the profit, not a certain percent of the profit. If you don’t put in a stop (not wanting to get stopped out on a dip), you run the risk of losing more of your profit, and, possibly, all of your profit. Yes, it is difficult.
I speak to this facing this dilemma in a trade going on right now. I recently bought SBUX with the plan to sell it when it hit my profit target. It hit my target, and as it did, a flurry of good news came out about the stock, UBS upgraded the stock to “buy,” and the volume picked up. So, I made the decision to pull my stop and let the stock run. Sure enough, the next day it hit a new 52-week high, and after hours it jumped past that. The tracks looked clear for a smooth run into the future.
Well, this morning, without any news, good or bad, the stock dropped some 2% rather quickly. Why? Clearly, it is profit taking, which takes us back to the dilemma – how do you know when to take profit or let your profits run? The answer is different for everyone, and, perhaps, different for each depending on the choice you make in the moment. For me, I made the choice and I will stick with it. The fundamentals of SBUX are good, and I believe it will find its way back to those cleared tracks I mentioned before.
Trade in the day; invest in your life …
