Exit stage left. Wed Feb 24

Once more on trading methods.
I like to work my way out of positions when I'm taking profits because it seems psychologically more satisfying but intellectually it can be difficult to justify. A lot of your money is made on the trades which you're able to hold for a long time and if you only hold a third of your original position for the best part of the move then you're cutting back your upside substantially.
I don't think that the stepped exit is always unjustified. I've done a fair bit of work on targetting versus letting the market take you out and I think that most of the time you get a similar or better profit result with a shorter holding period through targetting. You also ensure you've made something when a stock has a sudden reversal but nevertheless you do miss some of the mega moves.
It would be pretty subjective trying to work out which approach is best because the holding period reduction muddies the water as does the greater value of a smoother versus a lumpier profit profile.

Click to enlarge

I pretty much chose a stock at random and there was an example of what I'm writing about. Looking at the Bhp chart above, let's say you noticed the 1-2-3 buy signal forming in the first week of November. You might have gone long knowing that you could use the low from November 2nd as your stop. Gratifyingly, the stock took off and if you were using a 5 wave completion as your stop you might have got out when the 5th started to stall sometime in the 3rd week of the month. By contrast, if you were to wait for the last swing low to be breached which would be a reasonable, conservative trend following approach then you could have ridden the rise for another 2 weeks. In the end, though, your stop would have been around 4075, maybe 30 cents better than the other method but with a much longer holding period.

Then again, if you were trend following with a looser stop you might have stayed in till late January when the stock signalled a decent correction or a change of trend with a 1-2-3 pattern. Your exit in this case might have been close to 4290.

In this case you've held the position for two more months but made another, say, 7% on your original investment.

It's probably a matter of preference as to which approach you prefer, depending on how much time you have to devote to trading, how much action you want and how many better opportunities you might come across.

My preference is the targetted approach as I want to capture momentum and I feel that I have the time to find something else that's moving when a stock stalls. My only problem now is to actually stick to this plan. In the Bhp example above, I would probably have sold a third after a couple of days - just in case - and another third a few days later. I'm practising changing this habit using intraday trading in some high cap, high volume stocks in order to fast track things.