When a stock approaches support or resistance it is either going to break through or retreat from it. If, based on the definition of support/resistance the stock retreats most of the time then by taking profits in the support/resistance area I will maximize my return and not be ‘giving back’ profits as the stock retreats. In the cases where the stock does not retreat, and moves through support/resistance I will still have my profits and can roll them into another position. I do not need to continue making money on a specific stock, I can roll my profits into whatever is working. When trading I want to be positioned to profit if a stock, or the market, does the usual thing in a given situation. When the stock does not take the usual path I may lose a little, but since by definition stocks do the usual thing most of the time, that is the way to bet. Since downtrending stocks usually bounce from support, I am better off to take my profits before the stock reacts to a support level by bouncing which would reduce profits on short positions. If I have a long position and the stock is moving up toward resistance, then I want to take profits before the resistance area in case the stock follows the normal pattern and retraces from resistance which would then decrease my profits.Some traders are reluctant to take profits when a short position approaches support because they do not want to ‘be wrong’ and worry that they will ‘miss out’ if the stock keeps going down instead of bouncing. They are trading on emotion and ego, not logic. If the stock is most likely to bounce at support then most of the time you are better off to close the short position before it gets to support. There is no way to know what will happen on any particular trade. There are not magic indicators or super systems that will tell you the outcome on a specific trade. You are not smart if the trade worked and dumb if the trade failed. Traders focus on managing risk and being positioned to profit if the normal thing happens. When something unusual happens they may lose money, but it is by definition better to bet on the normal thing happening rather than the unusual. If the normal thing for declining stocks to do is bounce at support then I want to take advantage of this knowledge and use it to prioritize trades based on risk/reward, and also to take profits when a short position approaches support.In a trending market I may be holding 8-12 trading positions, and close to fully invested for the swing trading account, and replacing them when they hit their stops or triggers. I will also be taking larger position sizes and holding the positions longer when the market is trending. The clearer the market direction, the more funds I will have invested. When the market is uncertain I reduce exposure to stocks, and increase exposure to ETFs. The ETFs do not have the same bang for the buck as stocks, but there is usually something trending up and trends are good for the account.
Steve is the author of, “Money-Making Candlestick Patterns, Backtested for Proven Results’, in which he shares backtesting research on popular candlestick patterns and shows what actually works, and what does not. Steve is the publisher of the, ‘Timely Trades Letter’ in which he shares his market analysis and specific trading setups for stocks and ETFs.
To receive a sample of the ‘Timely Trades Letter’ send an email to email@example.com. Steve’s website:www.daisydogger.com provides additional trading information and market adaptive trading techniques.