What do I look for?
There are a number of reasons I may choose to close out of a trade. Today I want to share my thought process with you and explain how and why I close my position on certain trades.
If a stock has run up a huge profit (relative to what would normally have been expected), I may take off the table. I’ll look at the projected move of my A-B, B-C and C-D patterns. If it’s already hitting its move, the risk-to-reward ratio may not be in your favor for much longer. It’s a good idea to collect your profits while you can.
Stock Acting Choppy
What do I mean by “choppy”? A choppy stock could be moving all over the place, it may be brand new to the market, it may start acting volatile. I like to trade stocks with clean charts; I like stocks that are moving in a clearly defined pattern. If a stock I entered starts acting chopping, even if I just entered it, I’ll probably close it.
Stock Acting Sluggish
What do I mean by “sluggish”? I mean a stock that is going sideways or is only moving very slightly, very slowly. Whatever your directional play is (butterfly spread, vertical spread, etc.), if the stock isn’t moving then it may be time to get out. I want to see stocks that are moving. I want stocks that move the most points in the shortest amount of time – I don’t want sluggish stocks that just sit there and do nothing.
Stock Not Behaving Properly
If the stock is not behaving the way you had projected or anticipated…for example, if it’s not retracing at the volume you expected, then you want to take that trade off. There could be a change or shift in the momentum or in the attitudes toward this stock – if those changes are not in your favor, then exit the trade.
If you’re trying to trade stocks that aren’t in your favor, then the risk is against you. Instead, I recommend that you focus on finding trades that will be in your favor – stocks that move and behave properly.
We’re looking at the big picture here. If I enter a stock and 10 minutes later it is acting sluggish or people start selling off their shares, then I’ll get out….even if it means I’ll take a hit. It’s worth taking a small hit to make sure I’m in the kind of stock that will be profitable for me in the longer run.