Where to take profit?

How do I know where to take profit?

This is like asking when do you think one should get married? The answer is so varied and wide that it is almost unanswerable but maybe just maybe I can give you some relationship and trading advice.

The big myth beginners believe is that they are always going to buy a share at the very bottom and sell it at the very top for maximum profit. We are going to date in university, get married and live happily ever after. They look at the history of the graph and buy into the illusion of “what if”. What if, in a perfect world, that they could have bought Apple (or any other share for that matter) at $145 in 2018 and sold it at $324 in 2020. What if, every Romcom out there is true and “happily ever after” really is that easy. If Julia Roberts can do it, then surely, we can as well. However, those who have been in the market long enough know, that is it is a very different dynamic when you are in the position and you need to decide when to take profit.

The decision between greed (maybe it will go higher – what if I meet the perfect partner next week) or fear (maybe this is the best I can get) is a real one, and some even start to show physical symptoms of sweat and heated palms when they need to make the decision.

Don’t fear, not knowing what to do is quite normal. Become comfortable with feeling uncomfortable. It is part of investing in yourself. No trade is perfect, and neither is any relationship. You work with what you see on the graph and you make the best decisions you can based on the price action and indicators. If your partner storms into the house after a bad day, do not try to discuss the shortage on your budget. If the shooting star candle starts to appear on your graph do not go and buy more shares.  

One of the things we have to accept in the market is that you will probably never buy the share at its bottom and sell it at its top. There is no such thing as the perfect partner and that you are never going to disagree. Keep in mind there are always news and results and investor’s emotions that can pull and push at the share price and chip away at the perfection you seek.  

We want to give some guidelines on what you can use as tools in helping you make your decisions.

Step one is knowing which time frame of the graph to look at. If you are a short-term trader then use a daily graph and long term investors should use weekly graphs.

Consider taking profit when:

  1. The share is overbought and there is a negative divergence indicator. This can be used for any indicator that highlights overbought or oversold levels. Remember there is no such thing as the perfect indicator, it is more about knowing what the indicator implies and how to react to it.
  2. There is a turnaround candle or pattern visible (hanging man, shooting star, tweezer top, double top or head and shoulder formation) on the graph after the rally.
  3. Lower highs start to appear on the shadows or real bodies of the candles. Your evening conversations are becoming shorter and shorter is usually a warning sign that you need to work on spending more quality time together.
  4. The share has a lamp pole formation on it (a rally of more than 45 degrees). Too fast too soon. Dating a few months and getting married is rarely a recipe for success.
  5. For the past two or three sessions the share found some resistance and have stopped making new recent highs.
  6. Technical-good-bye kisses on the 200/100 or 50 day moving average or on weekly graphs the 10/20 and 40 week moving averages. If you don’t kiss one another hello or good-buy someone else might be doing the kisses. Be warned!
  7. Use the lows or previous strong support levels as protection levels or as first signs where weakness might creep in. Go back to why you fell in love in the first place and build on those blocks and if those don’t hold, you decide…

Again, use the above on the daily graph if you are a short-term trader and if you are a long term investor, use it on the weekly graph. The same principles apply.

Nobody can decide when is enough, enough. Is 15% profit enough for you or do you want 20%. If you do want 20% make sure the graph implies the same probability. If you want to get married to a rich beautiful, mature, well-rounded individual make sure you bring the same characteristics to the party.

Then you can consider:

  1. Taking all of the profit.
  2. Bank some of it, maybe 50%.
  3. Use a protection level, a moving average or strong previous support level and see if you can ride it a little longer.

Make peace with the fact that you will probably not bank it at its top, and remember when the share pulls back again, and it becomes oversold you can buy again and ride it again.

Many of you know already, nobody has ever gone bankrupt by taking a profit, but many have gone bankrupt by being greedy.

Once you have taken your profit, be happy and grateful and look for something else (this principle is not applicable in your relationship!) or wait for that same share to pullback and then buy again. Don’t, don’t try to chase it then! (Don’t come across as desperate, nobody likes a whiner). You have made your decision, now leave it and if that means the share rises another 20% then so be it. When it is overbought the probability of a pullback is more likely, so you want to use the probabilities on the graph to make your decision. While not an exact science use the candles and indicators as tools to guide you.

If your dating has been great and you have managed to work through some tough seasons while dating - your partner hasn’t stabbed, cheated or stolen from you – you-re both emotionally mature enough and you share similar interests, then and only then, should you consider getting married.

When is enough, enough? Only you can decide that. Look at the candles and indicators as mentioned above and take the easy money!

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