by Wendy Kirkland

You can arrange with most online brokers to receive email “price alerts” once you incur a certain percentage of profit or loss, which can alert you to times to buy or sell. This helps when you are not able to sit in front of the computer to monitor your trade.

It is advisable to have a profit goal and stop loss established at the time of you enter a trade. The profit goal can be a percentage above the premium paid or it can be an amount just under a resistance level, pivot point or trend line.

Traders often feel like they must garner the highest profit possible, yet some of the most successful traders are those who establish profit targets based on their strategy and trading plan, stick to them, and close out the day with consistent profits no matter the percentage. A trader who earns 24%, 16%, 155%, 85%, 44% and 340%, comes out much further ahead than the trader who earns 500%, -100%, 16%, -86%, 27% and -36%.

A turn of evens that often happens is this, a stock will earn a nice profit, maybe it even breaks through a resistance line, yet the trader doesn’t take profits because he decides to hold out for even more gains. Then the stock drops, so he feels like he lost money even though he still has a profit. The price drops further and the trader stubbornly holds as his profits diminish. He holds because he just knows it will go back to its earlier high and he doesn’t want to give up on it. Giving up would be like turning his back on an old friend. He holds until the profit becomes a loss and his stubbornness strengthens. How can he sell for a loss when it once had such a nice profit? He’ll give it more time. He will “one-more-day-it” until all the value is gone and expiration day is at hand. This whole process happens quickly with weeklies.

Still traders do not often learn from this experience, after all, they had a loss on the last trade so the next trade needs to earn double. The negative trade results get repeated over and over again out of greed.

This too, is a time when traders need to change their thinking. Each trade should be looked at as a new start, a new event that has been evaluated and is being traded based on what is happening in the market at the moment. Not based on trade results from the past, whether those trade results were positive or negative. Trade based on what is happening “now”.

There are 3 stop methods. You can determine a “mental” stop. You know the amount and will close the trade when it hits this amount, but you don’t’ actually set a stop with your broker. The reason a trader would choose to set a mental stop is there are occasions when market-makers will play games and manipulate a stock’s price by selling their shares so that the price hits your stop and then quickly recovers to its higher price when the market-makers buy the stock back. If this happens, it is usually when the stop is placed very close to the equity’s current price. They see the stop as a quick way to make money.

Of course, traders can set a sell-stop with their broker who will close the trade when it crosses that amount. This provides protection against the trade that turns against the trade’s direction. This amount can be an acceptable percentage loss or an amount that is beyond a line of support/resistance, pivot point or the break of a trend line.

A tool called trailing stops allows the broker to automatically close your position when a certain dollar amount or percentage loss has occurred. These are safeguards to protect you from unexpected circumstances, especially if you are expecting to be away from the computer for an extended period of time. Trailing stops are used to protect profits. As the stock’s price rises, the trailing stop rises proportionately (ex: as the price rises, the stop rises as well but consistently stays 10% below the stock’s price), then if the equity’s price turns, the position will be closed when it reaches the trailing stop amount.

The Issue of Emotion

Stops and trailing stops have advantages, the most important of which is that it takes the emotions out of closing a position to protect profit and closing a losing position; we might have a tendency to hang on a little longer than is advisable.

Nonetheless, it is always a good idea to fix an amount in your mind that is the lowest bid price you will accept, after which you will sell. Establish this amount at the time that you enter a trade and stick with the plan. Then decide whether this will be a mental, fixed or a trailing stop.