Lesson 10 – Managing the Trade

/Lesson 10 – Managing the Trade

Add to a winning trade    

Trends in quality stocks tend to carry on for several years. In the early stages of your trading career you will be tempted to take quick profits when they present themselves. To take advantage of these trends you need to consider adding to a winning position rather than selling far too early. To add to a winning position you need to look for another buy signal such as a new high price. My preference is to purchase half as many as your first entry.

If your first entry is $10,000 then add another $5,000, if your first entry was 15,000 shares then purchase another 7,500.

Take windfall profits

With stocks priced above two dollars I have a rule for taking unexpected large profits. The rule is simple. “If in any five consecutive day period the price advances twenty percent I will sell the stock”. Each weekend I check the closing price of my stocks, add twenty percent and place an order to sell at any time during the next week if that price target is reached. This will generally happen on the announcement of a takeover bid. Using this rule also overcomes the big question of “What should I do with the stock that I own during a takeover?”

 

Raise your stops

Part of your risk and trade management involves continuously raising your stop loss levels. In the ideal situation you will raise stops until such time as the price turns down and your stop is activated. This eliminates the big decision of when to sell.  There are several methods used by traders when trailing a stop loss. I always use a data point, never a percentage or a dollar figure. I am always very wary when someone says that they always use a $500 stop or a 10% stop.