It's day 6 of the 30 days to master part-time swing trading challenge and today we continue our discussion of risk management, this time focusing on profit taking and targets.
The Concept: Managing Risk With Targets
We usually associate managing risk with losses and stops, but equally important is where we take profits.
Sure, you have to protect what you have.
However, you also must win more than you lose.
So while we have to protect the downside, wins have to to increase at a faster rate that the losses.
This can be accomplished in one of two different ways:
- A higher win rate
- Bigger wins than losses
Ideally you get a combination of both. However, high win rates are difficult to achieve over time.
It's best to focus on achieving bigger wins than losses.
We'll talk about this more when we discuss reward to risk ratios, but for now the central point is we need to become very good at the reward side of the equation.
We must understand how to effectively take profits.
How to Effectively Take Profits
Four factors come into play when I take profits:
- The overall market strength and direction.
- The volatility and history of the stock I am trading.
- Key resistance levels that could impede the stocks progress.
- Where I placed my stop.
I don't have a defined rule for each of these factors, other than I like to see as many of these factors helping my position as possible.
Watch this video to learn how I use moving averages, them move on to the Day 6 exercise.
The Day 6 Exercise
Now that you've watched the thought process that goes into profit taking, do the following
- Pull up the chart of NFLX and other momentum stocks
- Pick stops that look like good entry points on the chart
- Use the 4 factor test to identify where your ideal target should have been for the trade.
Day 1: Getting Started
Day 2: Analyze the Market
Day 3: How to Use Moving Averages
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