The New Sell and Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines, Expanded Second Edition

CHAPTER 4

SELLING AT A TARGET

Once you select a buy candidate, you need to ask several questions:

1. What do you think is the profit target—how high is this stock likely to rise?

2. How low does it need to fall to convince you that your decision to buy was wrong and the loss should be cut?

3. What is this stock’s reward-to-risk ratio, what is the relationship between its potential reward and risk?

Professional traders always ask these three questions. Gamblers do not bother with a single one.

Let us begin by tackling the first question: What is the stock’s profit target?

A good way to set a target for a swing trade is to use either a moving average or a channel. To estimate a profit target for a long-term trade it pays to examine long-term support and resistance.

Putting on a trade is like jumping into a fast-moving river. You can walk up and down the shore, looking for a spot to jump in. Some people spend a lifetime on the shore, paper-trading their way through life.

You are safe on the shore: your skin is dry and your cash is earning interest in a money market account. One of the very few things in trading you can totally control is the moment you decide to jump in. Do not allow restlessness or anxiety to push you in before you find a good spot.

While you are looking for a place to jump in, there is another important area to scout. You must look downstream, where white water marks the boulders. You need to scan the distant shore for what may be a good place to get out ...