Pressing the "sell" button is one of the hardest things to do as a trader. There is no one-size-fits-all approach when it comes to profit taking. Securing your profits whether short term or long term demands an understanding of basic technical analysis concepts to allow you to run away with your loot at the right time.
To make it simple, entries and exits must be based on the type of play you are in. Before you even enter a stock position, you should already know the relevant levels to exit if the play goes according to plan or if it fails. Here are a few tips and best practices when it comes to selling in strength.
Locking Profits: Swing Trades
Swing trades are short term plays that leverage on potential upswings to sell quickly into strength. When a trader locks his profits on a successful swing, he no longer cares if the stock breaks out higher right after. The goal here is to be able to sell into strength and move to another swing trade for consistent profits.
The chart pattern above illustrates two ideal Swing Trade scenarios. The first swing starts with an entry at a valid MA100 bounce. The profit taking point in this play is plotted at the 1.90 key resistance. As you see, the EMA9 dynamic support (green line) is holding well throughout the rally. This suggests strong demand and may lead to a potential breakout. However, since the goal of this trade is to sell at strength, the position is sold near the key resistance.
The next Swing Trade opportunity is given when the price retraces back to its key support area at .80 - .85. Since the price have already rallied previously and is now below the MA200 line, the next swing may be shortlived. As such, the profit taking point is plotted near the MA200 dynamic resistance. DO NOT be tempted to hold it for the thrill of a possible breakout. Prices ranging below MA200 may need to consolidate for some time before any sizeable rally happens.
Locking Profits: Medium - Long Term Plays
Position and Reversal plays are medium to long term trades that leverage on institutional accumulation phases to ride the potential reversal or rally that happens after.
After steep market crashes, the price usually undergoes a basing formation pattern near strong multi-year support areas (see previous post Spotting Opportunities During a Market Crash). Position traders are keen to notice this and will ride along the wave of institutional buying. Once the market reverses, the chart will show a momentum pattern wherein the EMA9 line will continuously act as the dynamic support for the price.
The chart above shows a strong uptrend rally. The point of entry here is the price breakout from the MA100 resistance which is supported by a surge of buying volume. When the trend shifted to an uptrend, the EMA9 line can now be used as a momentum support indicator. This means, that you will NOT SELL the position as long as the EMA9 line is holding as a support. This can be somewhat tricky as the rally will encounter some fakeouts wherein the price will dip below the EMA9 and open again with strong demand the following day. To avoid selling at impulse, it is best to track the institutional buying and selling to get a feel of the sentiment.
The sell trigger in this setup is the continuous price close below EMA9 suggesting a weakness in demand. At this point, you will notice that it is mostly retailers that are buying and it is the big institutions who are now at the selling side. You can sell your position at this point since the rally is now encountering sustained selling pressure. Remember, if the big boys are selling, you are inclined to sell as well.
You may also want to check our previous post on Volume Analysis to better understand the content you have just read
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