2 methods for taking profits

The market continues to falter. The Dow has already broken its May lows. The Nasdaq (COMP | Quote | Chart | News | PowerRating) and the S&P 500 (SPX | Quote | Chart | News | PowerRating) aren’t far behind. 1245 in the S&P is an obvious and well publicized level of support. Expect the action to intensify around this level. It will be interesting to see if a break begins a cascade lower or a sharp reversal.

In the past I’ve written in detail on my profit-taking philosophies. As a quick refresher, I believe you must have a systematic strategy for taking profits. Depending on your style and personality, you may choose one of two methods for taking profits: 1) Too early. 2) Too late. In other words, don’t plan on selling at the top. You either need to sell into a bounce or rally, or you need to trail a stop. For most of my trades, I typically take a portion of my profits too early and a portion too late. The size of the portion depends on my market outlook.

In my last column, I stated that I was trading in “Bear Market Mode”. I suggested that part of trading in Bear market mode entailed taking profits quicker -- in other words -- too early. Some have asked “how do you know when it’s safe to try and let some winners run again?”

Easy -- let your trades be your guide. You don’t need to perform detailed market analysis. The time will come to go for longer profits when they start making themselves available. When you look at charts of stocks you took quick profits on and think “damn, I should have held on to that one for a bigger gain” then it’s time. Stocks will be trending higher rather than just bouncing, and your trades will tell you that. It is at this point that you may begin to take profits more slowly.

Best of luck with your trading,

Rob
RobHanna@Comcast.net

For those who may be looking to expand their knowledge beyond just market timing, my Hanna ETF Money Flow System utilizes the VIX in generating trading signals for spread trades.