Have you ever found yourself second guessing when you should close your positions? I had this very same dilemma today with a position I opened yesterday and although I fretted like a girl about it in the beginning, I’ve found a good strategy to help me choose when to close.
Yesterday I started trading with my new system. The first position I opened was a long on WHSmith.
Tody (much quicker than anticipated), the share price continued to rise. I was sitting on £130 of paper profits and was sweating at the thought of losing out on any of it.
There seems to be two schools of thought here, those that sit on ‘bull markets’ as long as they believe they’ll last and those that try and dip in and out of waves to sell on highs and buy on lows.
Although I’m not that disciplined yet, I’d like to think of myself as one of those traders who sit on their profits for as long as possible.
What I realised today though is that sometimes it’s very difficult to do this. Psychologically, we don’t seem to be programmed very well to sit and watch as our recent highs lose value and we lose potential profit, so we panic and sell, only to watch the price continue to rise.
Well, I guess it’s human nature to be greedy and when we see a ‘new high’ it seems to me that a lot of traders ‘take profits’, and this forms a trading barrier, or resistance level.
Look at today’s chart below for my WH Smith position that I opened yesterday.
You can see in the chart the area that I’ve circled is around the 580 mark. In 3 out of the 4 days circled, the price hit a ‘barrier’ at just above 580. Yesterday, it didn’t quite make that barrier before it dropped substantially.
When I was in the trade today, I was watching as it continued up. I was fretting about when to take profits, because on paper, I was sitting on £130.
But the position looks good to reach 600 points at least. It’s a bull market. Fundamentals are good. I should be sitting on this profit right now, waiting patiently for it to rise some more.
But I’m not. I bottled it.
I realised that the price would likely hit the 580 barrier again, and drop back off, even though I feel confident there’s more upside here.
I decided that the best strategy for me in this case was to set my price limit at the strong resistance level, take profits there and then set a price alert for when the price manages to cross over that barrier.
In this case, that would be around 590.
When WH Smith hits 590, I could be tempted back in.
Is this a good strategy or am I just wasting positions?
Mentally, I feel great right now because I’ve banked £150 today on this position and the price is now lower than when I sold it. On the flip side, I’m pretty sure that next week this could continue to go up…