Here's A Rule To Protect Your Profits When You Have Them

You’ve hit a price target in your swing trade and you’re looking to stretch your gains. Then your stock starts heading south. Determining when to sell stocks in this situation is best turned over to rules, not emotions. By raising your stop loss as you go along, you protect your profits and often save yourself from letting a good trade go bad.

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From the beginning of our SwingTrader launch in 2016, we’ve always tried to keep profits when we have them. Take SunTrust Banks (STI) stock, an addition from our first month live. SunTrust joined SwingTrader at 42.13 on May 18 (1). It was an early entry to a 43.13 buy point for a six-month cup with handle. After three days of sideways action, the stock flew to its first price target of 5% profit (2).

Our original stop loss for SunTrust Banks stock was 40.19, the low of the entry day. Letting a 5% gain fall all the way down to the stop loss would mean taking an 8% drawdown from the high. Why allow that kind of loss to your portfolio? What’s worse is the emotions can really kick in as you fixate on the profits you had. Thinking to yourself, “I can’t sell here when I could have sold above 44” is often a trap. Waiting for the price you want could mean risking more than you should in capital or time. It’s like the hopeless romantic waiting for the phone call that never comes. The solution? Rules help combat the emotional decisions that easily steer you wrong.

Rule For When To Sell Stocks: Hit The Price Target, Raise The Stop Loss

Once we hit our 5% price target, we automatically raise our stop loss to 1% profit from our entry for swing trades. With this rule in place, you don’t have to think about what to do. You just act. In this case, our 1% profit was 42.55 on SunTrust Bank stock. When it fell to that level on June 3, we exited the position without hesitation (3).

The stock ended up recovering a lot of the losses for the day. As it continued to climb it would be easy to kick yourself for a poor decision. But, there are plenty of times where the fall gets worse. Even in this case, the rise didn’t last long. A few days later and the stock was right back at our selling price (4). If you continued to cling to the possibility of getting the 5% gain, your disappointment grew. Two weeks later and there was more than a 10% decline. It wasn’t until five months later that SunTrust Banks stock recovered above 44.

Losing all the gains from the price target is usually a sign of trouble. At the very least, the stock usually needs to consolidate through time or price before continuing to move. Raising the stop loss keeps the trade positive and saves you time and money in the long run. Just as important, it frees you up for new opportunities that you wouldn’t want to miss

More details on Past Trades are accessible to subscribers and trialists to SwingTrader. Free trials are available.

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