How To Hold A Winner For A Big Gain
Generally speaking, we have a 20% minimum target for most trades when market conditions are favorable. That being said, we try our best to let the stock tell us when to exit rather than vice versa.
- If the uptrend is steep and remains above a 5 or 10-day moving average (on a daily chart) for more than a month, we then use a break of the 10-day moving average on a closing basis as a sell signal. Once there is a close below the 10-day MA we place a stop beneath that day’s low.
- For stocks that break the 10-day moving average within a few weeks of entry we use a break of the 20-day exponential moving average on a closing basis as the sell signal. Once there is a close below the 20-day MA we place a stop beneath that day’s low.
Lets go through a few examples. Most of the commentary is in the chart.
Back in 2017, we rode a nice trend in $SQ for a 34% gain.
Although we held on and did the right thing for the most part, we did not follow the rules 100% and placed a hard stop rather than wait for clear close below the 20-day EMA, which led to our exit on 7/3.
We held $BABA for a 40% gain in 2017. We followed our system for a 40% gain. This technique isn’t perfect but nothing works 100% of the time in trading.
$SE is a recent example of a stock in a strong uptrend that has yet to flash a clear sell signal.
$CDNA is a great example of how a great breakout can turn sour quickly. Although the breakout was strong with great follow through, the price fell apart and sliced through the 20-day EMA. The selling didn’t stop there, as $CDNA sliced through the 50-day MA six bars later. The first close below the 20-day EMA was the sell signal.
Some notes about the system
- When setting stops, if possible, try to place mental stops only during the first 15-30 minutes of trading, as stocks are vulnerable to wild action on the open.
- Do your best to hold on to the stock, but if its still setting lower lows after 30-minutes of trading then it’s probably best to exit.
- Selling partial size to lock in gains when up 20-30% isn’t a bad idea. There is no need to put the full pressure of the position on one sell. Whether you sell 20% or 33% of the position is up to you and your comfort level. You could sell none and hold the full position as well.
Managing trades using the moving average system above is a very simple but effective way to ride a trend. This system isn’t concerned with trying to call a top and there is no need to predict anything. The best trades will trend higher and won’t require us to do much of anything. Some stocks won’t make progress beyond an initial surge and force us out below the 20-day EMA with a small gain. That is trading. We take what the market gives us and move on. This approach has worked better than anything we’ve used in our 20 years of trading.
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