In my opinion, investors/traders don’t spend enough time on putting together a strategy that helps them decide when to get out of a profitable position. All of the effort gets channeled into finding a perfect system for where to get in – which of course doesn’t exist! But where you finally get out is what dictates your ultimate profit or loss, so let’s redress that balance. We will start off with the simplest approach, using previous levels to identify logical places to book profits.
Let’s use a trading example to identify the first method. The US Dow Jones index is always a popular one with those who use products such as spread betting for their trading. It’s a market that most people have heard of and, even on a dull day, it will travel through ranges in excess of 50 points – and frequently an awful lot more when really moving.
Since the US Presidential Election, American stock markets have been strong and regularly setting fresh all-time highs. The strategy of “buying the dips” – waiting for the market to recover and push higher still – has worked well. The middle of May saw the Dow sell off. In historical terms it was not a major fall, but as we had got used to the market grinding higher for months, it did come as a bit of a shock to some. Our savvy trader may have decided that this was just another buying opportunity, so got in on 18 May as the market showed the first signs of stability….