“The greatest profits I made were by selling too soon”

Monday, 26th October 2009 22:51 - by Riddler

Hi fellow traders. This week has been a funny affair, with the markets shrugging off some pretty dire GDP figures on the 23rd October, but still failing to surpass 5300. Today, (Monday 26th) the FTSE is down again, and testing support at 5118. Trading is very difficult at the moment due to the uncertainty surrounding whether the FTSE and DOW have priced in a ‘V-shaped’ recovery, which clearly hasn’t happened with 6 quarters of negative growth in the U.K. while France, Germany and Japan appear to be crawling out of recession. I remember reading the quote at the top of this Blog, although I can’t quite remember which famous trader it is attributed to, but the point is quite simple. I like the fact that it suggests that we sell before the peaks in the share price, and avoid greed becoming an all-consuming emotion. For those invested in shares which rise quite quickly, it is a good idea to keep an eye on early warning fatigue signals which can be the monthly Bollinger lines (found on the 1-month charts, and by choosing a 6-day moving base), and by keeping an eye on the relative strength index or RSI. An RSI of 70/100 or more suggests that the rise will come to an end soon, and the first sign is the first intra-day dip and daily close downwards. By setting clear targets and by sticking to sensible profit margins of 30-50%, you will limit the chance of emotion coming into play. If the technicals suggest that the rise is coming to an end, then prepare yourself mentally by writing down your plan of action - including exit price and sale volume. By doing this you can set yourself a clear, objective and unemotional ‘exit plan’ which you can execute without doubts or regrets. The quote is also important because, by selling early, you are more likely to be able to sell at the price and volume you want, particularly on illiquid AIM shares which limit sales when on the down-trend. “A long-term trade is just a short-term one gone wrong” is another adage which stresses the importance of selling and taking profits, rather than becoming locked into a downward spiral. If you fail to execute a sensible profit-taking strategy, the emotions of excitement and greed will turn to sorrow, regret, anger, frustration and potentially lead to panic selling at the bottom of the falls. You can sit there in a smug fashion, knowing that you have locked-in profits and have less exposure to any natural downside. The smart people...yes, you’ve guessed it, make the GREATEST PROFITS BY SELLING TOO SOON. Good luck.