How Do I Determine When to Exit My Trade?
A Discussion Starter for the DCTrader Meetup Group Meetup on March 16, 2010
by Bill Hider
DC Traders,
At last month’s Meetup, Feb 16, 2010, the question was asked: “When should I exit my trade?”
We had several answers suggested at the February Meetup:
1) Sell it if you would no longer consider buying that stock if you didn’t own it;
2) Sell it when you’ve reached your profit target;
3) Sell it when you’ve reached your price target on the stock.
4) Sell when your emotions told you to do so.
Some of you agreed with and some of you disagreed with some of these answers!
Please think about “When YOU should Sell”; come up with your approach to selling your trades and tell us all about it on Tuesday, March 16th in the Winecave room at La Madeline, Rockville, 7:30 PM.
You may agree or disagree with what I am about to say. That’s fine. Bring your point of view on Tuesday and please, let us know what you think!
Please post your thoughts in the files area of our website ASAP before Tuesday’s Meetup and bring a flash drive of your comments with you to the Meetup.
To get you started, here are my thoughts:
1. Sell it if you would no longer consider buying that stock if you didn’t own it.
Here’s the story I always tell from an investor’s view when I hear that #1 answer: 25 years ago or so, I bought some stock in the company my father worked for, New York State Electric & Gas (NGE, later bought by a Spanish utility, now no longer traded). During the 80s, I bought more NGE in secondary offerings they made, accumulating more shares & collecting their nice dividend, which was running around 8-9% at that time. Over time, the stock price varied, of course, and one day my broker called me to tell me it was time to sell NGE because the dividend had dropped to 6% - 7% -- even though the $ amount of the divided had not changed. Humm, I thought…what is she (my broker) talking about? I am still receiving the same dividend % because my dividend % is based on the price I paid for the stock, not the current price of the stock. Sounds like a trick that the brokers use to make commissions from stock sales! I did not sell!!
Here’s my take on this answer (#1 above) from a trader’s perspective:
Look at Master Card (MA) on March 4th; this is the setup to trade MA using the Bracket Trading system I have presented to the Meetup in January & February and am now using:
I set up my bracket (the green bracket on the chart) so that the entry was above 235.55 – just above where MA would begin to fill the gap, if it did. My initial stop was set at 233.50. My target was 253, the first failed rally above where MA gapped-open. This gave me a risk of 2 points and a reward of 17.45 or reward/risk of 8.7:1, approximately 2x my requirement of 4:1.
I entered that trade on Friday, March 5, 2010 with MA = 235.31. My contingency order to enter above 235.55 was triggered and MA dropped before by BTO order for the Mar 240 Calls was executed.
The next chart, below, is that same trade as of Friday, March 12, 2010, six trading days later.
Take a look and let me know if you would still want to enter this trade today (3/12/2010)? Why or why not? Would you have wanted to enter this trade on Tuesday, March 9, 2010 – when the TS was hit or even at the beginning or end of that day? Why or why not?
If you would not want to enter this trade on any of those days, should you then sell, per answer #1? Should you have sold on Monday, Tuesday, Wednesday, Thursday or Friday?
If you have a trading system that includes trade management, does that system override
“Sell it if you would no longer consider buying that stock if you didn’t own it”?
2) Let’s now consider: Sell it when you’ve reached your profit target
Still using the MA trade above, if my strategy was to sell after some fixed amount of profit, I may have sold on the 1st day of the trade (for a day trade) or on day 2, day 3 or any other day when my profit equaled my profit target. How is that for trade management?
3) Let’s now consider: Sell it when you’ve reached your price target on the stock
Still using the MA trade above, if this was my strategy, I would still be in the trade with no profit yet.
How would that feel?
4) Let’s now consider: Sell when your emotions told you to do so.
Sell anytime you get scared. Hummm, how does that sound?
Food for thought.
What is YOUR trading strategy for When to Sell? Let’s Discuss on Tuesday, March 16th!