Most Traders Get This Wrong

Most Traders Get This Wrong

Feb 05, 2020

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I want you to think of a great party you’ve been to… all your best friends are there. Your favourite music is playing. And you’re enjoying a drink.

Now, answer this: When’s the perfect time to go home?

For many of us, picking the ideal time to leave is next to impossible. Sometimes you leave too early and miss the best part. Other times you stay too long and pay the price the next day. Getting it just right can be a hard tightrope to walk.

The Goldilocks principle says the best result is between two extremes. The trick is to strike a balance. It’s about finding a point that maximises your benefit and minimises your downside.

Well, that’s the theory. How do you manage this in real-time? I’ll answer this in a minute. But first, I have an email to show you:

“I’ve only been subscribing to Motion Trader for six months, so I realise it’s early days in terms of results, but I was wondering about when to sell at a profit.

“I understand exit stops. But, for example, I bought Austal Ltd [ASX:ASB] at $2.38 a share, and as of today, have clocked up a tidy 63% profit.

“How will I know I should sell or hold such a stock?”

Member, David

This is an excellent question. Choosing when to sell is a key trading decision. And just like your favourite party, knowing when to “call it a night” can be tricky.

You see, many traders eagerly lock in small or moderate gains. They never hang around long enough for a stock to really get going. And they’ll often miss the best part of the trend.

Others hold onto a great trade too long. These people stay on well after a stock reaches a high and begins to fall. I’ve seen many traders give back big gains this way.

So what’s the solution?

Well, let’s look at this from David’s perspective… apart from buying, what’s he done to get this far?

The answer is simple… he’s done what I believe every trader should do — resisted the urge to bank a profit. You see, no one knows how far a trend will go. Some run a short distance, while others rise hundreds of percent. Just a few big trends could really boost your returns.

The trick is to know when to eventually sell. And this is where my strategy for selling comes in. It’s called a trailing stop. The aim of this strategy is to maximise your upside, while minimising the risk of holding on too long.

Here’s an example of what I mean:

This is the chart for Jumbo Interactive. I gave this buy signal to members of my trading service. I also own shares myself. Now, look closely at the red line below the share price. This is the trailing stop. It helps ensure you don’t stay in a trade too long. The party is over when the shares touch this level. (Since filming, I've exited my position in JIN. My finial exit price was $18.29 on 11/12/19, locking in a gain of 550%)

People sometimes tell me that the trailing stop is always late to sell. And they’re right. A trailing stop won’t get you out at the top. And that’s okay. I believe it’s better to sell a bit late than way too early. The reason my holding is up around 622% is because I’ve been prepared to sell late. I also resisted the temptation of taking a smaller profit along the way.

Many traders sell too early and miss the best gains. Others ride a stock all the way up — and then all the way back down. Finding the right time to sell is one of the hardest acts in trading. But there is a solution. Jumbo shows what’s possible when you pair a big trend with a suitable exit strategy. It’s the best way I know to leave the party in the Goldilocks zone.

So that’s all for this week. If you liked this video, or even if you didn’t, scroll down and leave me a comment, or maybe a thumbs up. Also, if you’re watching this anywhere other than my website motiontrader.com.au then head over and have a look.

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

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