When you are sitting in good profit, all you see is green on your quote machine. Wow! What’s a beautiful sight!
Unfortunately, the green color also plants a seed for complacency; and thus, you open the door to give back much of your profit if not all before you wake up from the hypnotic effect of the flashing green light.
An antidote is needed to protect us from the narcotic effect of the green flashing light! And what better way to jock us back to reality than a red flashing light?!
When a gift is handed to you by generosity of the market in the form of January effect, you have to say “Thank you” and walk away with the gift. But you don’t want to walk away when the gift is not done giving yet, right? So, here is the trick I used that can protect myself from being mesmerized by the green flashing light.
When I am sitting on a decent profit and the market reached a point in the chart that look like a strong resistance. Even though my intuition feels there are still room to run. I take my profit as soon as the price started to stall at the resistance line. If price retraced from the resistance line, then I look for an area of support in the short-term chart and start buying back my position. While this is an optimal strategy to buy back my position as a lower price than what I sold; this is not as important as making sure I buy back my position. Often time, I ended up paying a bit more to buy back my position or I bought back at same price plus commission fee.
Do you know where I’m going with this? At this point going forward, the green flashing light is no longer guarantee if the market correction continue. Instead of feeling more forgiving to my portfolio shrinkage due to the flashing green light. “Hey, I’m still deep in the money, no worry” kind of thought is no longer an option for me to entertain. I hate seeing red flashing light and I have a habit of liquidating my position if the red light flashed passed a certain percentage. I’ve no tolerance for red flashing light!
There, there, unless you are gunning to buy and hold for at least a year to take that long term capital gain for tax reason, the only downside of this strategy is that I may end up paying a bit more than I got out in order to stay in my original position. That is why I only execute this strategy around resistance point (or support point when I’m shorting). Think about it, if the stock rally hard and break thru resistance after I got out, I’ve no qualm jumping back in at higher price because of the powerful momentum behind it; as in my DNDN trade. All I want is to participate in getting a piece of the pie; where I jump in relatively to my past trades is not as important as making sure I hopped in the train before the risk becomes unacceptable.
The additional benefit of this strategy I used is that sometimes I may not buy back the same number of shares I sold due to the lofty height of the price in the chart. This reduction of shares also protect my realized profit if I’ve to bail out of the 2nd buy with a small losses.
Of course, this only work if one is allergic to red flashing light like I do.
While this strategy sound simple, it is not easy. You have to overcome the mesmerizing green light and the fear of missing a rally right after you got out. The way I look at it, keeping a piece of your win (not necessary at the high (or low when short) is what trading is all about.
Needless to say, today I closed enough position to raise 65% cash because I saw way too many red flashing lights!
p.s oh, almost forgot. “Thank you market for the generous gift of January effect!”