Use Trailing Profit Stops
New and veteran retail traders must be keenly aware when entering or exiting a stock or option because this is where most losses occur. The better the entry and exit signals, the higher the profits. Taking the time to learn how to properly enter and exit a stock trade is something that will reap huge rewards for many years to come.
Exiting a trade is often a place where emotions are running high, even for a savvy veteran trader of 20+ years. If profits are soaring, the euphoria that sets in can make it harder to really see the price action and what is going on. Greed may take over and the desire to get just a little more profit may end up being the decision that wipes out all of the gains of the past few days for Swing traders. For Position traders the entries and exits are far more forgiving, the gains are significantly higher, and the risk is lower because the precision of a swing trade is not required.
What Swing traders need to remember most about exiting a trade is that once in profit use trailing profit stops, based on the technical and fundamental support levels on the chart. Fundamental support is always stronger than pure technical support. Next determine whether the run is momentum or velocity, as this makes a huge difference in where to place the trailing profit stop.
For the chart below the run is momentum. So the trailing profit stop needs to be below the prior day low or at a consolidation area because the candlesticks are constantly overlapping, and the wicks and tails are rather long and frequent. What is happening with this stock is the momentum run was triggered by High Frequency Traders HFTs as shown by the high volume bars in the TechniTrader Volume TTVA indicator in the middle chart window, and then chased by smaller funds and retail traders. Price is too steep to sustain, and the Angle of Ascent™ will cause the stock to fall.
Many retail traders may want to hold on hoping that the stock will run higher. However indicators warn holding too long may be a high risk decision in terms of how much profit is kept, as the stock begins to fall due to profit taking.
This stock has been under profit taking mode since the black candle within the run. It now has many little weak indecision day candles, these are not hammer candlesticks. These are the newer candlestick patterns that expose how large lots are controlling price even as the smaller funds and retail traders are buying speculatively. TechniTrader Quiet Accumulation TTQA is green but that is not a Dark Pool giant lot pattern. The giant lot Institutions are selling very carefully so they are not disturbing price. However the stock is losing energy aka Volume so this run is exhausted, and at risk for profit taking.
At this point the exit should be to simply exit the trade, but many retail traders will hold on rather than taking profits with the larger lots. Retail traders often try to “get out at the top” of a run rather than collecting their profits and moving on to a lower risk trade. Study the small candlesticks to see that many times HFTs come in and then sell off in one day. Since retail traders are not able to trade the millisecond like the HFTs, by the time they enter their sell order and the order is processed the stock can move down very fast causing a loss of profits.
Martha Stokes CMT
Instructor & Developer of TechniTrader Stock and Option Courses
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