At this point all but GE should be moved to break/even stops – there is simply no rational reason to hold any of these names which have pushed up so strongly if they retreat all the way to the our entry price.
Our next major task ahead is profit taking, and this requires the traders active participation in the process. Each individuals goals and personality make up will determine their approach to profit taking.
Early on in a trade that has potential to run, I personally will give the trade as much room as it needs to do so, provided that price has moved far enough in my favour to allow a break/even stop to be placed in a location where price is unlikely to revisit if the move is to continue. That is likely the case here with XLB, SPY, IWM, DOW, QQQQ.
As we can see on this big-picture intraday chart of SPY, the 50% retracement from the current highs brings price back to the swing high formed on Feb 2nd. This price level is above our entry price, so while a retracement here would represent a significant reduction in our open trade profit, the trade technically is still alive provided any retest there passes.
For this reason, I will not move my stops up past this point until a 50% retracement of the total move from the swing low marked clears this location. There is every potential that markets could retest the 2005 highs so we don’t want to be too tight on our profit taking stops.
Consider taking only partial profits as price stalls
Its the classic trader’s dillema – you have what appears to be a terrific entry, price moves nicely in your favour, and then stalls and reverses and starts eating into your profits. Unnerved by this, Trader X bails the position with diminished profits, only to find in the next bar or hour or day that price has continued higher without them.
In a trend following trade we can use the trend to help us in locating profit taking stops.
When I have doubts about a move, one technique which I have found extremely useful is to tail price with a stop on only a portion of my position – usually 1/4 or 1/3 of the position. Early on in the trade I will tend to take 1/4 off the table if price appears to stall; if a deeper retracement kicks in I’ll take another 1/4 off the table before price hits the 50% retracement level. This chart shows various locations where I would consider locating a trailing stop using this approach:
Unless it becomes clear that price is undergoing a major reversal, I will leave 1/4 to 1/2 in play at a break even stop, until the first significant retracement has occured and price has moved to a new extreme in the direction I am trading.
05.02.07 11:59 #