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How do you take profits?

Monday, 10th May 2010 20:32 - by Riddler

Hello fellow traders. With those healthy rises in equities over the first 4 months of 2010 culminating in many stocks and indices reaching new 12-month highs, it may have crossed traders’ minds to ‘bank’ those gains. This got me thinking of my strategy and whether it was the most efficient means of banking healthy gains, or whether I need to adapt my approach with a longer term approach. In essence, my strategy over the last 18 months has been to bank any profits over 50% and use the funds to top-up one of my other portfolio stocks if they were presenting ‘Buy’ signals on their 3-month charts. The aim of this is ensure fluidity and safety by banking gains when a share is giving short-term reversal signs as demonstrated by decreasing volumes, overbought RSI and MACD and a drop beneath the 9-day Bollinger (See my lessons on pages 1-10 of 'Riddler's Technicals'). The theory is best explained by one of the stocks I am invested in; ANGM. I invested in ANGM and, after a great flow of news in early 2010, the share made new 12-month highs @ 7.50p in February 2010, leading to a 150% gain on my ANGM portfolio. I made the reasoned decision that because ANGM had risen almost non-stop for 12-15 weeks; a retrace in the share price was inevitable and natural. I took some profits and used these healthy gains to add to my other holdings. The ANGM share price did indeed show fatigue and consequently retraced some of its 12-15 week gains. The point of my strategy is that retraces not only affect your ‘paper’ profits, but also have a time-frame dimension whereby any ‘paper’ profits, if not taken, can be sat there for 6-8 weeks before the next leg up. Therefore, by taking profits you can take the ‘time’ factor out of the equation and recycle those profits while ANGM stays stagnant. In ANGMs case, it is not only 30%+ down on those February highs, but ANGM has taken two months to do so. However, what this means is that you are not ‘fully invested’ if the share has unexpected good news (although by only taking some profits, your original holdings can enjoy the longer-term gains). My strategy is not to be confused with ‘Day-trading’, I believe 100% in the fundamentals of the shares I have chosen, many of which have been part of my portfolio for 12 months or more. I enjoy the flexibility and the conservatism of ‘top-slicing’ profits and rotating gains into my other shares. I would be interested to know if I gain more or lose more in the long term by employing this strategy, which requires technical insight, timing and focus. I would be glad to hear from other posters as to what strategy(ies) they employ within their portfolio. Regards.

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