How Would You Handle This Dilemma?

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So, when should you lock in a trading profit?

Think about this carefully. Your answer could influence your odds of success.

You see, people often tell me that a trader shouldn’t be greedy. These people like the certainty of banking a modest profit. They say it’s better to sell early than risk a lower price tomorrow.

But what if prices keep rising?

You know, I’ve seen many traders come and go over the years. One of the biggest reasons they fail is due to a poor exit strategy. Their mistake often comes down to cutting profitable trades too early.

This week I’m going to put you to the test. I’m going to show you a trade from my own portfolio and ask you to think about how you’d handle this situation. I think it’s going to give you a big insight to why some traders make a lot more money than others.

Okay, so check this out:

 This is the share price chart for company called Appen. It might surprise you that I bought a stake in this stock when it was trading at an all-time high. The shares were also up almost 100% in previous six months.

Now, I know many people are nervous buying after a strong move. They reason that a stock must be nearing the end of its run. Their overriding concern is to avoid buying at the top.

But this is often a mistake.

You see, a strong share price is positive. I believe it’s the best indicator that a rising trend will continue. And some trends continue for a very long time.

Okay, here’s the next chart: 

Buying near the all-time high was a good call. Appen quickly ran to even higher levels. My shares were up 41% in only six weeks — it was a terrific start to the trade.  

Now, this is where many traders struggle. They know they should hold. But the lure of a quick profit is often irresistible. They also fear that a correction will wipe out their gains.    

Think about how you’d handle this trade. Would you cash in your chips? Or would you let it ride? 

This is one of the biggest questions a trader needs to answer. And what you do could determine whether or not you’re going to be a successful trader. 

So, I’ll tell you what I did: I held on.

Now, letting a trade run involves risk. It means accepting that an early gain could vanish. The 100%-plus winners are the reward for taking that risk.

This is what happened next: 

APX fell 25% in just three days. Most of my paper profit went up in smoke.

So, was not taking an early gain a mistake? 

Not at all. Letting the trade run was the right decision for my strategy. That’s how I’m able to get share prices moves of over 100%.   

You see, most of my trading profits come from stocks that run a long way. Banking an early profit caps this potential. That’s why I let my winning trades run.  

So, what happened to Appen?

Well, it turns out the sharp fall was just a correction.

Here’s the final chart in the series: 

The early selloff appears as a blip in a bigger upward move. There were other corrections along the way, but I was able to ride them out and stay with the trend. 

I eventually sold for a 115% gain. No, I didn’t exit at the high — and that’s OK. My aim is to get the big middle part of a trend. This is where I make most of my profits.

And do you know what? I couldn’t have done this if I’d sold for a 20 to 30% gain. My willingness to give back a modest early profit has made this possible. Letting your profits run is the key to banking triple-digit winners.

So until next time, I’m Jason McIntosh, and let’s find some trends this week.

Meet Jason

I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney. 
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.