By Dr. Alexander Elder and Kerry Lovvorn
In our post last Monday, we shared our latest short in Apple. Today we show how to set profit targets on swing trades.
Once you have a profitable trade going, where do you take profits? Should you grab them quickly? Hold out for more or even double up? A person struggling with these questions often finds himself on a stressful seesaw between greed (let's make more!) and fear (please don't let me lose what I have!).
Using clear rules will help you reduce stress and make intelligent decisions. The power word in trading is "Enough!" We need a measuring tool with which to tell what is enough in any given trade.
One of the few scientifically proven facts in financial markets is that they oscillate above and below value. As technical analysts we believe that value "lives" between a pair of moving averages (MA). We draw a channel: two lines parallel to the slow MA so that it contains approximately 95% of all prices for the past several months.
When we wrote our Apple /zigman2/quotes/202934861/composite AAPL -1.23% piece last week, prices were beginning to sink below their value zone. When they hit the lower channel line later in the week, they gave a signal to cover. Reverse these rules in uptrends: Buy near value and take profits in the overvalued zone near the upper channel line.
This method doesn't guarantee catching the absolute low or the absolute high. Instead, it sets a realistic target, helping take reasonable profits without stress and then move on your next trade.
In our www.spiketrade.com group, members compete for prizes and bonuses by submitting their favorite picks for the week ahead. Last Monday, one of us piggybacked a pick by one of our elite embers, shorting Edwards Lifesciences /zigman2/quotes/205745196/composite EW +0.20% .
After the close that day, the company was hit with bad news and opened sharply lower on Tuesday.
For many people this would have been a source of stress: to cash in, to hold out for more, or to double up?
For us, using channels as profit targets has largely eliminated stress. Since EW opened below its lower channel line, the target was reached and even exceeded. This trade had accomplished what it had to do, and the course of action was clear — take profits and exit. There was no regret over failing to squeeze the last few dollars of profit.
Using channels provides logical profit targets and reduces stress in trading.
We analyze markets on a daily basis, at our website www.spiketrade.com
Add to watchlist
AAPL
