I received an e-mail last week from an angry Stansberry Short Report subscriber. He was upset about a recent trade recommendation.
The subscriber conceded that he had earned more than 7% on the margin requirement for the trade in a little more than one month.[ad#Google Adsense 336×280-IA]But he was disappointed that I had recommended closing the trade early because his gains would have been larger if he had held the trade into today.
Here’s the deal…
I recommended selling uncovered-put options on networking giant Cisco (CSCO) in early January.
The broad stock market was oversold and CSCO was trading well below its 50-day moving average (DMA).
So I was expecting the market to bounce and for CSCO to rally back up toward its 50-DMA.
In the short term… I was wrong.
The market continued to fall and CSCO dropped even further below its 50-DMA. But the fundamental argument for the shares remained strong.
So I was willing to hold the trade – and even buy calls on CSCO in my other newsletter, the Stansberry Pro Trader – in anticipation of a bounce back up toward the 50-DMA.
We got that last week.
CSCO bounced back up to its 50-DMA, which was my initial objective for the trade. And I recommended closing our position – which was previously at a loss – for about a 6.5% profit in 46 days (more than 50% annualized).
The stock continued higher. And we could have recorded an even larger profit today if we had held the trade just a few more days.
But here’s the thing…
No one knows the future.
We take on trades based on risk/reward setups with reasonable and clear profit targets. CSCO reached its target (the 50-DMA). And having once held the trade underwater, I was pleased to be able to recommend taking a profit on the position.
Remember, the objective of trading – especially in a bear market – isn’t to maximize the profits on any one trade. The objective is to look for good risk/reward setups and then take profits as the trades meet their targets.
That’s what we did with CSCO.
Of course, today I can look at the trade and say I wish we had held on for larger gains. But I can provide any number of examples of trades where holding out for more would have eventually meant giving up profits and taking losses.
You should never expect to buy at the absolute low and then sell at the absolute high. That would be a perfect trade. And perfection is a tough standard.
Rather… you’ll do better over time by looking for good risk/reward setups and then exiting the trades as they approach your initial targets.
I’ll give you an example from my personal trading account…
Recently, as the S&P 500 was retesting the 1,812 low from January, I was looking to trade a stock in anticipation of a bounce. Since semiconductor stocks typically lead the market, I was looking at a trade in Qualcomm (QCOM), which was about $42 per share at the time. It was at nine times earnings and paid more than a 3% dividend. Plus, at $42 per share, it was trading well below its 50-DMA, which was about $47.
So I liked the odds of selling uncovered-put options on QCOM, with the objective of covering the trade as QCOM approached $47.
That happened last Tuesday.
I cashed out and recorded a profit on the trade.
On Monday morning, QCOM traded at more than $50. I could have made even more money if I had held the trade. But… I DON’T CARE.
I entered the trade originally looking for a bullish move. I got that move. So I closed the trade when it achieved my original objective… and I recorded a nice profit on the position.
If I had held out for the absolute high to close the position, I could have made more money. But if I’d been looking for the absolute low to open the position, I never would have entered it in the first place.
My point is this…
You can’t kick yourself for taking a profit on a trade that meets its original objective. Otherwise, you will have a miserable trading experience.
As traders, we’ll have plenty of opportunities to beat ourselves up over taking losses on trades. If we also beat ourselves up over taking profits – because those profits could have been even better – then we’ll never be happy.
Life is too short to worry about things like that.
Be willing to take the gains early. Don’t worry about exiting a trade too soon. Enjoy the trades that meet your objectives. Then sit back and wait for another great risk/reward setup.
Best regards and good trading,
Source: Growth Stock Wire