For most traders, it can be difficult to hold your winning positions, i.e., letting your winners run. It’s important to have clearly defined reasons to sell (or reasons to cover in the case of a short position) for your particular time frame and strategy. There are many different reasons to sell, again based on your strategy and time frame. For example, some traders may use Fibonacci levels/extensions as price targets, other may use a break of a trend line, others may use a break of a moving average, others may use a break of a support level, others may use oversold/overbought indicators, and some short-term intraday traders may even use a held offer (held bid in the case of a short) as a reason to sell as well.
What I would like to highlight in the post is not only the importance of having a clearly defined list of reasons to sell but also the importance of letting your trades breathe if there isn’t a clear reason to sell. After all, what’s the point of cutting your position when the market isn’t giving you a reason to do so, as defined by you?
Today, I traded the biotech stock $ALKS (Alkermes Inc.) on the short side after it had a negative news catalyst behind it (i.e., it was In Play). The stock was gaping down over 34 percent on the day on above-average volume. With such a negative news catalyst and broken longer term technicals all around, I was focused on the short side. After seeing the drive lower on the open from $40 down to $37, I watched the stock retrace back up into VWAP, which was where I initiated my short position (see chart and tweets below). As you can see from the charts and tweets below, I covered some of my short on the way down to book some profits and take some risk off the table. But I thought there was a very real probability that this could be a “close at the lows” play. Based on a simple ATR (average true range) multiple, I thought it would be reasonable to potentially see a move to around $32 or so. With that in mind, I decided to hold a “core” intraday short for the possibility of a multi-point down move. I lowered my stop a couple of times as the stock made new lows, but ultimately the stock never gave me a reason to cover (based on my list of reasons). I eventually covered the my “core” short into the close.
— Jake Huska (@MarketPicker) Jan. 21 at 10:58 AM
Covered 2/3 $ALKS short. Holding last bit as intraday swing short. #Intraday
— Jake Huska (@MarketPicker) Jan. 21 at 11:09 AM
— Jake Huska (@MarketPicker) January 21, 2016
— Jake Huska (@MarketPicker) Jan. 21 at 11:20 AM
— Jake Huska (@MarketPicker) Jan. 21 at 01:20 PM
Covered last bit of intraday $ALKS short here into the close.
— Jake Huska (@MarketPicker) Jan. 21 at 03:56 PM
It can be easy to book all your open profits when you are multiple points in the money, but holding even a small core position when there is a high likelihood of a trend continuation can make your week or month. The key is to clearly define your reasons to sell/reasons to cover and describe exactly what each of those factors looks like. This will help you to know when you should be selling/covering your position and when you should be holding out for a larger move.
Please let me know if you have any questions or comments.