Trading The Trend - The Selling Dilemma

21st Aug '20 by Michael Taylor

28 comments 4192 reads

This week someone asked me that it’s hard to know when to sell, because both “always run profits” and “plan your exit strategy before trading” seem conflicting.

Picking a target price to sell or derisk the trade doesn’t seem like running profits. And to be honest, I don’t entirely agree with “always run profits”.

Running profits generates the fat tail on your R winners and losers bell curve. That much is clear. Cutting losses at 1R max, and including some slippage, whilst keeping R constant, and generating 1-3R wins is nicely profitable if you’re right 50% of the time. And if you throw in a few multi-R winners in there, that does pay for a lot of small 1R losses.

It’s not unusual for a trader to be able to pinpoint his or her (or whichever gender you self-identify with) best trades in a quarter that have contributed significantly to P&L growth. The Gaming Realms that I highlighted in the column in the 12s now trades in the 23s (I’ve not sold a single share aside from the stock I bought specifically to trade).

If you strip out Warren Buffet’s Apple trade, what’s left? Sure – he’s still one of the greatest investors of all time – but that huge win accounts for a significant amount of his performance. There’s nothing wrong with that, because in trading and investing I see it as about staying in the game, relying on small wins to tick the account over and grind higher, and every now and then run a big winner.

Peter Lynch pointed out that if you’re right 6 out of 10 times in this business then you’re good. He achieved a 29% CAGR over a thirteen year career running the Magellan fund at Fidelity, and he claimed this was due to owning small caps that just kept on growing and getting bigger. He said that his biggest mistake was cutting winners too early. However, investing and trading are two different ball parks.

That said, whilst I agree with generally running profits, I’m also happy to have fixed target prices. That means that stocks will inevitably carry on going after I’ve sold, and I’m OK with that. I’m not here for home runs on every position. Hitting first and second base on a regular basis is not a bad thing. “Leaving some for the next…

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Michael Taylor

21st Aug '20

Thanks Mark. Exactly - you have to decide what the stock is to you.

If it's a short term trade, then you're sacrificing a long term move. And if you're a long term trader, you've got to be prepared to see some short term volatility.

Hi Wilkonz, you can utilise trailing stops on your spread bet positions and these will prevent you seeing a nice gain turn into a loss.

However, you do have to factor in for average volatility and spread. Naturally, if the average volatility is around 10% and your stop is at 8% from the current price - it's likely you'll be stopped out.

I do agree with this Lawman, yes. If you're ever unsure the "sell half" trick works fantastically well!

Hi Michael, I don't look at RSI ever. Stocks can stay overheated for months so to me it doesn't provide much use.

I'm not saying that a strategy of using RSI to sell can't be used or doesn't exist - only that I personally don't use it. You would need to backtest it to find any commonalities.

I prefer candlesticks and support/resistance to gauge supply and demand.

You can only tell in hindsight if it was a good sell or not. All you can do before that is stick to your plan!

Yes, I agree, I will sometimes consider fundamentals in my decision to hold the trade or sell. But momentum and the chart come first.

Michael Billingham

Thank you, Michael.

I've been following the RSI on each of my shares for a couple of weeks now. Yes, some do stay in the o/s zone for quite long periods. Other RSIs have tracked the price up and down but in harmony with and not early enough to give advance warning of an upcoming fall in price.

I suppose if they were a reliable indicator of potential price movement, everybody would be using them.

Thank you for your help.

Snowbum

Hi Wilknonz,
I’ve improved my spread betting by using the ATR, approx 1.2 ATR on the daily candle for the s/l trailing each day as Michael suggests.

I do get stopped out more often but I keep my balance from taking fewer hits.

Forbsy.

Need to stop using my phone on the site to post...

I ‘don’t’ get stopped out more often ‘and I’ keep my balance.

William K

22nd Aug '20

Thanks Michael. Trailing stops are certainly a part of the answer. My losing trades were in spot silver and spot gold. Normally I move fast manually to 'protect zero' as soon as a trade is 5% up, even if it means missing out on a profit. On these instances I was so convinced (inexcusably and idiotically) that the price was going to continue rising that I took my eye off the ball and let the price slide overnight. Big mistake. A triumph of greed over fear.

Thanks Forbsy. Stop losses are a real challenge in spread betting. I tend to go for a fixed 10% initially with a get out quick at 5% as the calculation is quick and easy. On the whole I go for low beta, low ATR stocks so I guess this isn't far from 1.2 ATR as you suggest. I'm relatively new to spread betting and still developing a system that works for me.

Have you tried using a 3 bar exit on spot gold/silver? I've had some joy of late with this method on FX and Indices, seems to work quite well on all time frames to catch it when trending and be out when it turns. Now my preferred exit strategy for high volatility instruments.

Thanks. I've taken a look at it and it's nice and simple, but as you say probably more suitable for indices, Forex and spot metals. My foray into spot gold and silver was experimental and I tend to avoid indices and Forex. Most of my trading involves US stocks and I'm working on using the 10 day low as a stop loss rather than a notional support level or fixed percentage, providing the 10 day low is within 10% of the buying price and preferably 5 or 6%. This would translate, roughly, to a 10 bar exit. I'm hopeful this will be useful for moderate breakouts following a period of volatility contraction. Nous verrons.

tim boddington

Lawman's strategy works well.

50 years ago I started my portfolio with 3 basic shares, UNI, RIO, once RTZ, and AZN previously ICI.

I set targets and sold 25% once that target was achieved. The share holding was then left until the previous total value was reached with 75% of the original shares. This could take 6 months to 5 years.

The sell off funds were used to buy mainly small cap and mid size companies. Names such as Hanson, Glaxo, BTR, Medreva and ML Labs, for example.

Dividends exceeded inflation and have averaged about 5% per year, much higher in the early 80s. Dividends were used for major capital projects, building, education and holidays or simply reinvested.

Some catastrophic investments have delayed progress, Mrs Fields (cookies), Weston Medical, NMC healthcare and Boohoo. Emotional purchasing does not pay! The failure rate has cost 2.5% of portfolio value over the years.

This strategy balances the diversification value of the portfolio. Healthy dividends have been spent or reinvested throughout, depending on family needs.

The 3 share corer stones have held up well. RB, Reckitt and Benckiser, was added two years ago. Current stars include Games Workshop, Avast and Computercentre. AAPL Apple may be added at the end of this month when the shares will be split.

The portfolio value has increased from £3,500 in 1971 to £150,000 today. At least £50,000 has been withdrawn from the fund. It has worked for me because I stick to the plan and use achievable targets and have low expectations. Moving on line has greatly reduced the trading costs over these years.

Diversification 99

Interesting. Some new ideas. My approach has always been to buy good quality companies (mostly) small caps at low prices and hold on if the story remains the same and top sclicing along the way. So a buy and hold strategy. My hold period can be short, medium or long term. I don't tend to buy the same share once I have sold it. I'm interested in doing more trading as I think a balance between the two approaches can increase profits.

What I was interested in finding out is what sorts of annual percentage returns a trader of say average abilities can expect to achieve with this approach? So someone who is winning as has been mentioned 60% of the time and with losers at 40%?

With normal long term investing don't they say if you are achieving 15-20% annually you are doing very well? So with this more frequent trading approach I would think the annual returns would need to be significantly better to justify the extra time and effort on one's resources; it may be difficult to do with a full time job?

It's hard to find this kind of real information of actual returns achieved. I suppose with the greater volatility since March traders returns may be artificially high so it would be good to know what kinds of return can be achieved during normal times.

Any information greatly received.

Losses taken need to be factored in to your equation. Jack Corsellis has a great table in one of the videos he posted a link to recently in his trading springs and breakout thread, showing profitability in a table of %win vs % loss combined with your strike rate.

Also, from a Tweet by Mark Minervini:

For example - 40% bat. avg. 20% gains -10% losses... you simply compound four (4) 20% gains and six (6) 10% losses... answer = 10.199%

Mike888

23rd Aug '20

Recently I decided to test my stock picking ability, It would seem I'm not as good as I though I was.

I pride myself that my hit rate is in the top quartile, at least in terms of profitable trades, this has been the case for a very long time. Undoubtedly luck has helped some of these trades, although I'd say that bad luck has largely balanced balanced the books in this respect.

However, the one thing that has dented my ego is that I have discovered that maybe I'm not such a good stock picker after all. I am a rule based trader, you could say to the point of being robotic, although I pick my candidates via fundamentals.

A few weeks ago, just for fun, I picked 5 stocks completely at random from the FTSE 350, and back tested my methods over 3 years, it took a few hours. Good news and bad news.

First the bad news, I am not as good at stock picking as I thought I was, having selected 5 stocks completely at random, and I know that 5 is not a particularly good sample size, each of these stocks made a profit in each year, each had both long and short positions at various times in the 3 year period. The returns were not a million miles away from what I achieve by stock picking. Hmmm.

So the good news, or I guess a consolation for my bruised ego. For me it would seem that my particular system is honed to the entry and exit of trades rather than selecting individual stocks.To be honest, I like the stock picking element so won't abandon it and maybe with a larger sample size, or by selecting different years the outcome would be different. One thing I should do however, is to resist the temptation to crow about the stocks I choose, it would seem I'm no better than the flip of a coin !

tradermark

24th Aug '20

If you don't analyse the situation, identify what went wrong and learn to avoid it next time won't history keep repeating itself?

Breakout Trader

27th Aug '20

I've recently implemented a set of rules which I intend to stick to for selling. The intention is to remove any kind of subjectivity or emotion - basically, trying to take myself out of the equation as much as possible.

I follow Mark Minervini's trading approach, which relies on tracking your past results - Average gain and win rate - in order to maintain a profitable RR ratio.

So, my average loss for this year is around 5.5%.

My rules for selling are:

- Sell half the position when profit hits 20%+ - This could be 22% or 23%, or more in reality, depending on how fast price is moving. But basically, at 20%+ I'm looking to sell half.

- For the remaining half position, move the SL up to +15%. This means that price has a bit of wiggle room to continue upwards, but if it does drop back and take out the remaining half position, I make a minimum of 17.5% profit overall on the trade, which is 2.5x my average loss.

For reference, my max stop loss when I enter a trade is 8%, but trades may be closed earlier if price shows signs that it isn't moving up.

The Ox 2906

3rd Sep '20

My old boss Bill Leask used to say “feed the turkeys when they gobble”.

Trading the Trend - The selling dilemma

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Michael Taylor

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