“Your trading should consist of small losers and big winners. You need to let your winners ride.”
Even if you’re a new trader you have probably heard some variation of this trading advice on a weekly (maybe daily) basis from your social media feeds. But they almost never tell you actually HOW to let your winners run.
Letting your winners run is crucial to long-term trading success, especially if you have a system that has a lower win rate. You need to have a dynamic “reasons to sell” list in order to have big winners.
Taking profits just cause you’re green on a trade will kill you in the long run. Early profit-taking is a major reason why so many traders fail to be consistently profitable month to month. Here are 5 strategies to let your winning trades play out to their full potential.
1. Set a Profit Target Before Entering a Trade
There are only two reasons for you to exit a trade: If your stop loss has been hit, or your first profit target has been hit. Before entering a trade you need to have a profit target in mind. This will allow you to hold through times when the stock is going against you, and allow you to have better risk versus reward trades.
You will have no conviction in your trading if you don’t have an idea where the stock “should” go after you enter a trade. Daily resistance, support, and moving averages will help you define accurate profit targets.
2. Take Partial Profits and Trail The Other Half
Taking partial profits at your first profit target is a great way to let your winners ride. Once you have locked in some profits, it is much easier to be patient with the other half of your shares. It doesn’t necessarily have to be half the shares you sell, it could be 1/3 or 1/4.
This will also prevent you from being in the situation where you’re up a lot on a trade and it comes all the way back and turns into a red trade. Some traders might prefer to lock it all in at the first target, so it all depends on your trading system and your personal exit strategies.
3. Use Moving Averages
Stocks will often trend with their moving averages when they are on a strong trend. You want to see if a momentum stock is trending with a particular moving average. If you a see stock trending on its 9 EMA for example, the stock will pullback to the 9 EMA, test it, and then continue trending. Your first sell signal can be when it breaks through the 9 EMA. To use moving averages as a sell signal be sure to see evidence of the stock respecting a particular moving average prior to using this strategy.
4. Think Where the Opposite Bias Would Enter
If you are long a stock, a great way to figure out where to take profits is to put yourself in the shoes of a short seller. Think about where you would start in short on this chart? This will allow you to stay patient with your shares, since you know there has been no clear sell signal yet. When you have this mindset, you will not just sell randomly when the stock goes down a lot. You will be waiting for a clear sign that the trend is over, and it is time to take profits.
5. Have The Daily Chart in Front Of You
The daily chart will give you conviction about where the stock should go. Having the bigger picture will keep you focused away from minor intraday fluctuations in the stock price. If you can picture what the daily candle will look like once you are in a trade, it will give you conviction to hold your position and not sell early.
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