One of the hardest parts about trading is your exits. How do you know how far a stock will go up or down? How do you stop taking profits too early? How do you know the stock won't reverse and your winner will turn into a loser?
You will never catch the full move. You will probably leave money on the table on every single one of your winning trades. But you should always strive to at least capture the meat of the move. Taking profits too early is painful, and hurts the risk vs reward ratio on your trades.
We recently discussed what factors to consider when exiting a trade. Today we will talk about my favorite strategy for exiting my positions that allows me to stay in winning trades longer: Scaling out.
What Does Scaling Out Mean?
Ever been up on a trade and wonder if you should take your profits? Did you decide not to, and the stock ended up fully reversing on you? Struggling traders will typically enter or exit their whole position at once.
Scaling out is the best solution I know for exiting positions. Scaling is a method where you sell/cover a fraction of your shares when you have an unrealized gain on a stock position. This allows you to realize profits and still keep you in a position to capture a bigger move. I will typically exit my positions in thirds or halves, but you can also do it smaller fractions if you want.
Move Your Stop Up
Once you take partial profits, a great way to minimize your risk is to move your stop loss up. Once I sell a ⅓ or ½ of my shares, I will often move my stop to breakeven (my entry price), or to a higher support level.
This allows me to lock in a decent gain, make the worst case scenario a green trade. This makes it WAY easier to stay in the trade longer and let your winners run. You still have to wise about where you place your stop when you move it up. If you move up your stop too much you risk getting stopped out prematurely on the rest of your shares, and missing the rest of the move.
Scaling Out Example
Let’s talk about an example of scaling out in a recent trade I had in ROKU. A few days ago when it had a quick pop in the morning. Here’s a screenshot of the intraday chart from Monday when it ran:
I got long at $59.75 with 1500 shares at the market open on the 4/9. I sold 500 shares at $60.21, another 300 at $60.62, and 100 at $60.78. I sold another 300 shares at $61.33 and then stopped out the rest of my shares at $61. Notice how I didn’t sell at the exact top, which was $61.92 that day. But I still captured the meat of the move. I moved my stop up to $61 after exiting most of my position to ensure I would have a green trade. Also, notice how it faded off the rest of the day after that pop. If I didn’t scale out into strength, the stock would’ve come all the way back, and a big winner would’ve turned into a loser.
Scaling out works great with swing trading also. Paul scales out on his swing trades all the time. Scaling out is a great way to minimize trading emotions, as you can lock in gains to help eliminate the fear of a winner turning into a loser/breakeven. It will increase your patience on your trades trade, and make it easier to let your winners ride.
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