Very often when the market is going through fast up and down movements where a big down day is followed by a big up day, it gets confusing as to what exactly to do with some of your stocks. For instance let's say you buy something today and by the close it is up a few dollars. Do you hang on to it and "hope" that tomorrow brings more? Do you sell it figuring that "a bird in the hand is worth two in the bush?" Well no matter what you have read in your travels through different financial sites, the answer is: There is no good answer. How many times have you been up a few dollars just to see the futures red the next day and you open lower than where you bought? A lot I'd bet. Similarly, how many times have you dumped out with your 3 dollar gain only to see the stock go for 3 more the next day? A lot I'd also venture to guess!
In reality, it is only "safe" to hang on to a position when the overall market is in a full blown trend. But as we know those have not been coming very often. So just what can we do about daily ups and downs? Well one thing is you can do is base some of your judgement on "support levels" and that will certainly help. For instance if you bought XYZ for 100 and it went to 104 for you. If 100 was a recent support, you could feel fairly safe that at worst it should only come back to that support. But if it does, that wipes out your profit doesn't it? Yup.
The next logical thing of course is to put in your "trailing stop" where you would maybe put in a stop order to sell it if it goes down to, say 102. That will help, but again, if the next day the overall market is in a pout, it may open lower than that. That isn't very attractive either.
I have found over the years that one way to keep yourself in the play without giving up all your "potential" is the "taking of half" concept. The idea isn't very profound, it is just one that has helped me over the years. The idea is simply this: At the end of a day, if you are up nicely on a position, sell half of it at the close. Remember folks, I am talking about a choppy market where you really don't have much clue as to whether the market can still keep going or if it was a one day move.
So lets look at our example above. If we bought XYZ at 100 and it went to 104, let's say we had 500 shares. If we sell half of it, that is 250 X 4 dollars per share profit = $1,000 profit. But, we still own 250 shares. So if XYZ goes up another couple dollars the next day, we just made another 500 dollars. At that point we could sell another half and lock in that profit, or "let it ride" so to speak. But the best part of the idea is this, you never get cheated out of a profit.
Let's say on day one XYZ goes from 100 to 104 and you sell your half. (250) shares. That got us a 1K dollar profit. But let's say the next day XYZ doesn't go up, but instead opens at 102 and heads straight down. We can sell out at our original price of 100 and our profit is still secure. We could even let it fall past our original buy point by a little bit if we still had faith in the stock, and we still wouldn't be in a "losing position". (don't forget we still have a one thousand dollar profit, so we "could" let XYZ fall down to 96 before the entire trade becomes a loser)
Even when the overall market is going through all kinds of up and down contortions, there are stocks that are heading up. If you happen to be lucky enough to be in one of them, try using the principle of "selling half" near the end of the day and you will have already "locked in" a guaranteed profit. If the market goes up the next day, you are still in the play, if it heads down, you can sell out your other half and still have a tidy profit on your hands. I find this works really well whether you are doing 200 share trades or 1000 share trades, stocks or options. When times are tough, give this a shot, you won't be disappointed!
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