One of the most difficult decisions to make when trading and investing is knowing when to lock in profits. The emotions of greed often have traders and investors holding too long. Likewise selling too early may lead to Heartache as you watch an equity continue higher.
The questions you should ask yourself when locking in profits. Am I taking profits based on emotions or a change in technicals or fundamentals? Am I feeling FOMO or Greed? Or is this a reaction to the Boom Doom and Gloomers or others who often over-react to news?
If there is nothing technically or fundamentally changing, then why would you close a position early? Remove your emotions and focus on technicals and fundamentals.
“I made a fortune getting out too soon” – J.P. Morgan
What is implied by this quote:
I literally have that phrase sitting above my desk under J.P. Morgan’s picture. It is there not to remind me to just take profits, but as an emotional check. Am I feeling the emotion of greed or fearful that I will miss a greater move? If I feel either of those emotions I will close out the position. Also if sentiment is overly bullish and the herd is getting greedy I will also close a position out.
What often this comes down to is the position of the market and the current trend. To be clear there is never anything wrong with taking a profit. Nobody ever lost money taking profits, but taking profits too early often results in under-performing longer term buy and hold strategies.
Now to be clear, with highly speculative instruments, such as speculative alt coins or growth stocks we lock profits in when we can not when we have to. Completely different animal here. The focus on this article is Bitcoin, which is the least speculative of this market.
When to Take Profits:
There is no correct answer, but there are some guidelines that you should follow to assist in making this decision. First, what is your strategy? Are you a day, swing, position trader or investor?
Shorter term trading strategies:
If you are a day or swing trader, your motto should be “take profits when you can”. Day trading, is a separate beast, so we will focus on swing trading. For swing trades, often it is lack of a plan that results in failure. By this I imply that every swing trade should have the following:
- A defined entry
- A defined stop loss
- Target level(s)
Whenever we post a swing trade, we define the aforementioned, but this is not all there is to it. During a trade if the market appears to be changing, we will close out a trade early. There are several variables that go into determining this. A few reasons to exit a trade early is:
- Reversal pattern at a resistance or support level
- Break of the trend line
- Change in structure
- Hesitation near a target
- Other technical indicator negating the trade
Sounds easy, but when you have skin in the game, and cash is at risk, emotions can take over. Shorter term strategies should always be take profits when you can, but only if there is is a sign technically that momentum may be stalling. There is a thin balance between giving your trade a chance, and closing it out early.
This takes years of experience to get a good feel for and is why so many new traders fail. Often they take profits on their winners to early and let their losers ride too long. Over the long haul this results in losses.
Even the most experienced traders sell to early or ride their winners too long, it is minimizing this that increases your long term gains.
Longer term trading strategies:
This is where it gets more complex, and most investors get either greedy and hold to long, or they fear losing their profits, sell to early, only to watch their equity push new highs.
Some Longer term trading strategies:
- Do not focus on 2 hour charts. Your guide should be the weekly and daily, not shorter term time frames.
- Look at the sentiment surrounding the market. Is it euphoric yet?
- Look for the equity to start taking out daily and more importantly weekly lows.
- Change in structure on a larger time frame. Vertical moves after a solid run are generally a sign of a market top.
Lets take a look at Bitcoin and see if there are any reasons for long term position traders and investors to exit and lock in profits.
The weekly has nothing bearish about it. Bitcoin is breaking out of consolidation and moving higher. There is a preliminary target area around 6400. This would complete the 3rd wave of the mid term cycle.
This could also be the 1st wave of a mid-cycle pattern. It would seem based on the previous 2016-2018 rally that this is a good possibility. This would also be a valid structure for the path to 35k, but there is still not enough information yet.
Regardless I do not like selling in a 3rd wave because these are generally the longest moves. Even if it tops here, there is generally a retest of the 61.8% retrace of a bearish swing.
Targets: Always have them!
My longer-term targets are 80%, 250% and 500% higher than where we are now. The first major resistance level (38.2% retrace) is not until 9700 which is an additional 80% move from here. Those were my targets from 3200 and nothing has changed in the structure of the chart, or the sentiment of the market that would have me changing my mind.
I’m not saying we get to these levels in the next month or two, but I do think by the end of the year 9700 is a good possibility. In addition are we closer to the 3200 bottom, or closer to the initial target of 9700?
We are closer to the bottom, so why would I sell here? Just because it rallied some? Actually I am looking at buying the dips, not selling the blips. I want to cost average during the initial leg of a bull markets, and this requires a change to our DCA strategy. We will go over this more in our premium article.
With short interest so high, if we do get a short squeeze it is very likely we take out the 6k level and 6500 would be the lower area of where we can expect an interim top based on the current position of Bitcoin. Whether it gets to 6k or 6800 is insignificant a short squeeze will take us higher if and when it triggers.
Sunday nights seem to be notorious for action. I would not be surprised to see a short squeeze once the futures market opens or shortly there after. I can not tell you how many times I was about finished with our Weekly Letter only to have to start over because of a Sunday night breakout.
Lower support is around 4450 and this will likely be a buying opportunity and maybe the last one we might see under 5k. We never know until we get there, but based on the bullish nature of the structure this is a level of interest if and when we get there.
This is why we do not just issue Buy Limits with anything. We have coins and stocks where we are looking at levels to add, but we wait to see how it reacts when it gets there. Why is this?
Technically we can pullback to the 4250 area and still consider the bullish structure intact. We could also from a broader perspective still retest the lows, though this is becoming less probable with the structure of the chart. The 4900-5400 area is the more likely area to for completion of wave 4 and on a reversal pattern we will look for longs out of this area.
So far retraces have been relatively shallow, showing signs that buyers are stepping in to buy any dip. With all the “lock in profits”, “the top is in”, sentiment on TV and social media, who do you think is buying the dip? The retail trader? Probably larger operators accumulating inventory for an introduction of Bitcoin to the mainstream.
Lost In FUD:
Lost in all the FUD recently surrounding Bitfinex, is the fact that both Ameritrade and E-Trade are going to launch trading platforms for Bitcoin and a couple other coins. Fidelity has already launched Bitcoin custody for its institutional traders, but if Ameritrade and E-Trade offer Bitcoin to retail investors, most other brokerages are going to follow.
Ameritrade already has Crypto currency trading listed on their investment products page. They are in the final stages of offering this to their 11 million + clients with over 1 Trillion in assets.
This is how Wall-Street works. Keep the FUD in the news so the retail investor is scared out of their holdings so they can buy at a reduced price. I posted a couple months ago, an interview with Jim Cramer on how large fund and institutional money managers use the Wall-Street Journal, CNBC and other news outlets to put FUD in the market.
If you did not watch the interview you should, because it gives some good insight from someone who was involved in these types of maneuvers.
Dumb vs Smart Money:
When there is a lot of FUD in the market, and retail investors are calling for a pullback, step back and see what the chart is telling you. News can lie, but the chart and the flow of money never does. As FUD continues to circulate, retail investors are “locking in profits”, or selling the news, Bitcoin continues to grind higher.
In addition short interest continues to remain elevated and they have been yet squeezed out of their positions. So we have FUD scaring the retail investor, shorts piling into a crowded trade and the tape is showing money flow into the buy side.
Who do you think is buying here, smart money or dumb money? Don’t follow the herd of voices telling you the top is in, the news outlets posting FUD because FUD attracts clicks. Don’t listen to that guy that has been posting every week at every new high to “lock in profits”. He is out of coins to lock in profits, and is now likely to buy back in higher than he sold. This happens all the time in bull markets.
In the end listen to yourself, what the chart is telling you, not the bull crap spewed by analysts.
Greed and Fear:
We are still closer to the bottom then the initial target area, which is why I will hold and buy any dip off a reversal. In addition look at the environment around us and what the flow of money is doing from the tape. Do you think this is the area for long term investors to lock in profits?
- Are you feeling the emotion of Greed right now?
- Are you feeling the Fear Of Missing Out?
- Or are you simply feeling the Fear of losing your profits?
IF it is greed, then probably a good time to sell. Most are likely feeling the fear of losing their gains, not the fear of missing out, which is not a sentiment indicator of a top.
When deciding to take profits as an investor, make sure you have a clear picture of what is actually going on, where he market is, and the direction of money flow. If money is still flowing in the direction you are positioned, there is no point in exiting position trades. If we are closer to the bottom, then the top, why would you sell your long term inventory. You sell at highs, not lows, and in the broad picture we are no where near the previous high, or any broader target in between.
In the end it is your call. Every situation is different and there is never a bad time to lock in profits, just ask yourself before doing so, is this an emotional trade or is there a technical or fundamental reason for letting go of a winner?