Today’s topic is learning when you should be taking profits and locking in gains! This sounds easy, but tell that to your greedy fingers! Imagine this, you have prepared for your trade and you entered into the dip.. the stock start to slowly climb but the hesitation of Level 2 (watch this DVD to learn everything about Level 2), mixed with larger sellers prevents the price from up trending in a confirming fashion. You are already up a couple cents but no where near your goal. What should you do?
90-95% of Traders Lose
Greed and Fear
90-95% of traders lose. This common statistic is drilled into the brains of successful traders. Why is this? Human nature is greedy and greed ruins many things in life from the planet all the way down to your trading account! It’s like the worst trickle-down-affect. When you are scrolling through the internet on apps like Twitter, you probably see traders bragging about their “massive” gains. You hear phrases such as, “going to the moon,” amongst others. Now you want it because others “have” it. Makes sense; after all, if they can, why can’t you?
The other half of traders are scared. They don’t want to miss out or be left behind. They fall into the fearful category of not wanting to disappoint those who tell them to “hold and invest” (in such sh*tty companies). The “traders” they follow tell them they are “weak” if they sell or are “against” the individuals or companies. It’s all a psychological trap that makes you buy while they sell.
Locking in Safe Gains
What makes the 5-10% traders that succeed so different? Do they lack greed? What about fear? Are they algorithmic traders? Robots! CLONES!?! How can these traders be SO different than the majority?
It’s simple… after many and many years of self discipline! They learn from mentors like, Timothy Sykes, who has learned over 20+ years of transparent trading and has been teaching students for over 10+ years thus creating over a handful of millionaires!
These students focus on themselves and apply very strict discipline that they have refined over many years and thousands of trades! After all, one thousands trades at a profit of one thousand dollars equals one million!
When To Profit
Can You Do This?
So when do traders decide when they should “just take the profit” vs letting a trade run? Well, back to the above scenario from the opening paragraph… The trade is facing “resistance”. What is resistance? This could be a place on the chart where the stock could break above in the past. It is a clear pattern that can be found especially if you have studied lessons such as this, this, and this!
You can identify the hesitation by the Level 2 which every successful trader has! Level 2 allows you to see market makers, share size, and price – level 1 is just time and sales! This is very important when “reading the tape”. This is another term for reading Level 2. Market Makers love to manipulate Level 2 so make sure you REALLY STUDY THIS DVD!
Volatility is KEY! Without a bunch of liquidity (traders going in and out – look at the volume) then it makes trading a stock much different!
So while you are watching the Level 2 you can notice that a certain “key level” may have a seller with 20k shares. A key level could be the previous resistance found on a larger scale such as a 2yr, 5yr, or even 6 month chart. If it is testing that level, then you may want to consider taking profits as it is not guaranteed that the stock will breakout at that time. By “breaking out” I mean the stock spiking above that level until the next key breakout level or resistance. (Remember that this is not an exact science and requires countless hours of studying as no two trades are exactly the same!)
Don’t worry, the links above will help walk you through identifying these levels and terms that I am talking about. Don’t get frustrated as it takes time to learn all of this, especially if you are brand new!
Congratulations for making it this far!
The stock breaksout above a key resistance level, say 2.40. You buy the breakout at 2.41 and you read level 2. It is spiking pretty fast until it reaches 2.5 and it crashes below 2.4 to 2.35. But the stock spikes slowly to 2.47. Your goal was to make 20-30 cents but the stock is showing a heavy seller of 20k shares at 2.49. You asses the volume and it is still green but not as solid as the previous candles.
What should you do?
A. You hold and hope that the stock will continue it’s uptrend and continue with the potential breakout until it reaches your goal but if your goal is reached it could go further so you hold!
B. You cut losses quickly when the stock drops below the 2.40 breakout level.
C. You put your sell order at 2.45 to assure you are below the 20k seller at 2.49 and can lock in a safe gain and take your small profit.
Pretty obvious right?
The safe answer is C.
You can also let the stock test that 2.49 seller and see if buyers increase their volume and take out that seller, but the safe thing to do is lock in a majority, if not all, of your profits before that seller- as that seller could tank the stock back below the 2.40 level.
In this example you have been watching a stock for several days/weeks. The perfect morning panic has occurred and you buy the dip at support. Support could be a past resistance level that now acts as a rest, kind of like a seat, that the stock will drop to and hold around that area. Once you buy, say at 3.00 on the drop. Your goal is to make about 30 cents. The stock jumps to 3.37 as fast as it panicked and it is clear sailing on the Level 2.
A. Type in 3.35 to sell into bid price to lock in safe the 35 cents and be grateful for your gain?
B. Type in 3.37 and try to sell into the sell asking price for an extra 2 cents profits?
C. Wait and watch to see how far the stock goes until it drops potentially losing all the gains and then some?
D. See the stock climbing and no resistance until 5’s so you try to sell at the top of the spike?
The best answer?
The safe answer is A…
You don’t want to get greedy as singles add up. This contributes to your discipline as the potential for home runs carry outstanding risk vs the potential reward.
Better Safe Than Sorry
Trade safely as you can’t go broke taking singles. And with today’s pandemics, tragedies, amongst other monstrosities, it is best to have some sort of security. By teaching yourself such a discipline as to taking profits and locking in safe gains, you are starting a future for a longterm opportunity as a trader.
Rule of Thumb: If a trade is not going your way or as you planned, it is okay to cut the trade off and take a gain, break even, or cut for a small loss.
Repeat Rule #1 – Cut Losses Quickly when a trade goes against you in order to protect your account! ESPECIALLy if the drop was NOT a part of your trading plan!
Don’t Add To Losers!
And Always remember to…
Practice Safe Trading!!!