August 04, 2009 at 12:55 pm | | Comments 4

Scale Out of Winning Trades with Partial Exits

It’s common among traders to think that you either have to be all-in with a stock or all-out of a stock, but that sure isn’t the case.

Many of us do our buying in one piece, entering a full position at one time as an important level gets crossed. This is my personal preference, as I continually seek out trading opportunities where a ceiling is shattered or a floor implodes, enabling price to make a nice move through it.

And when I am wrong (yes, when, not if ), I’ll exit in one piece.  As events occur or conditions emerge to show me that the stock is clearly moving in the opposite direction of what I had expected, I’m going to bail out of the trade and protect capital.

So, I’m getting into trades in one piece, and I’ll stop out of trades in one piece.  But rarely will I exit a winning trade in just one piece.  Instead, I’ll scale out.

Advantages of Incremental Profit-Taking

Over the years in dealing with traders from literally around the globe, I’ve found that very few of them will get out of favorable trades in pieces.  Adopting this method of booking profits can be an excellent way to trade, and particularly in a momentum-based market like the one we currently find ourselves in.partial-exits

Taking partial profits and peeling off a portion of your position on the way up carries with it several advantages.  Let’s look at a few…

1You can lighten your exposure into favorable moves. As your trade makes its move, it’s a great idea to start reducing your position size.  The idea is that as a move progresses, it naturally becomes more difficult to capture similar returns to the initial move.  Typically stocks surge early, so this is a way to take advantage of that early momentum.

2Make room for new opportunities. This isn’t just for those who may be trading with a smaller account and need to raise cash to put toward a new play.  In fact, even traders with larger accounts may find it difficult to manage a lot of positions in terms of the attention they can devote to each trade.  Catching the move you initially were seeking can remind you that it may be time to shed some shares and seek out another stock to put your money and/or attention into.

3Let slippage work in your favor. Posting offers on the way up means you’re capturing the bid/ask spread – not paying it.  I use market orders for entries and for stopping out, because when I need to be in or out of a trade I don’t want to haggle over a few cents.  But when it comes to booking profits, limit orders resting at higher levels mean you’re out there offering out some inventory, letting someone else pay up for it.

4Satisfy the urge to take cash off the table, yet still stand to gain from a continued move. This is a big confidence booster as well as a way to manage money wisely.  Turning some of those paper gains into real profits not only pads your account, but it also reinforces that you’re on the right track.  Gaining some momentum in your trading is a great thing, both for your account and for your psyche.  And by adjusting the stop for remaining shares, keeping even a portion or a core position allows you to benefit from a major move, should it occur.

Trade Like a Surfer

Just as a surfer catches one wave after another, a good trader maintains the same mentality.  Ride the best moves you can find, but don’t be shy about easing out of a trade once you’ve caught a nice move.  Paddling back out to locate the next one will require your availability, so when you start smiling about a trade, it’s probably time to start scaling out.

The fear of missing out on a giant run keeps many traders from selling at all, but scaling out carries with it the best of both worlds.

Consider making partial sales in your next winning trade, and see what it does for your bottom line.  It just might be the best adjustment you make this year.

Thanks for stopping by and I’ll see you here soon with more. Until then…

Trade Like a Bandit!

Jeff White

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