When to take profits on a winner is probably the most difficult aspect of trading….. however, it’s a good problem to have!
As short to intermediate-term swing traders, we prefer to hold positions anywhere from 5 to 15 days. Over the years we have found that most quality breakout or pullback entries can easily run 10 to 20% over a 3 to 4 week period. If this is the case then holding on to a winning position once it is up more than 20-30% is risky, as the stock becomes vulnerable to profit taking and a sharp pullback.
So what is the solution? One approach is to sell into strength of a big volume up day once we have a significant winner. Once a stock is up at least 10% and we have held for two weeks or more we look for a big volume accumulation day to exit a position into strength. A trade we made back in 2010 in GMCR is a good example of selling into strength.
We purchased GMCR in our newsletter on a breakout from a tight ranged consolidation on March 2, 2010. Prior to the breakout, we loved the tight base of consolidation at the 20-day EMA from 2/5 to 3/1. The chart below illustrates the buy entry:
Here is the exit:
After a 3-week hold, we used the strong breakout bar on 3/17/2010 to sell our position into strength and lock in an 14% gain. We only risked about 3.5% on the trade, so in terms of reward to risk we were at a healthy 4 to 1 ratio. Our job isn’t to catch the highs of the move. Our job is to make enough money on a trade to make the risk worth while and repeat this process over and over.
One could also take partial profits into strength and hold on to the remaining shares with a stop below the most recent swing low. What you do depends on what you are comfortable with.