6. July 2012 01:25
A couple of months ago I was privileged to meet two people who have made an phenomenal success from trading with my methods. By this I mean they had multiplied their account TEN-fold in just three-and-a-half months.
They're a father-son team and they trade together too, both holding each other accountable to each other. When they contacted my team to say thanks and to relay their success I wanted to hear their story, and quite a story it is.
But most importantly, I wanted to know how they were approaching the markets. Here's what they said. "Guy, we follow your trading plan to the letter. It has to be a perfect setup, otherwise we don't trade it. And here's the most important thing ... We ALWAYS TAKE PARTIAL PROFITS AT YOUR P1 PROFIT TARGET, just as you taught it. And sometimes we take it earlier than that."
I asked if I could see their account, and I saw just how fastidious they are about that one simple rule that is part of my trading plan. And only recently I've been talking about a stock which has gone on to highlight this message of taking that first profit target when it's on offer.
In the last week or so I've mentioned BIDU shaping up as a good opportunity as the OVI was negative and it was approaching support.
I could also see that it had formed a range recently between 112.50 and 124.50. If the stock were to break down below 112.50 this could signal a short trade.
The question is ... where to take profits. In this case it wasn't forming a bear flag per se, so we take an identifiable range and extend it by a factor of 0.382 (or less), and take our profits at this level.
So here, the high of the range was 124.80, and the low of the range was 112.50, making a range of 12.30. Multiply this by 0.382 and you arrive at 4.70. Take 4.70 away from 112.50 and you arrive at a P1 Profit Target of 107.80. Now, if you wanted to bring the P1 closer and easier to achieve, you could increase this level to say over 108, but let's assume we didn't do that.
Here's the setup, and as you can see the stock broke down below Level B (112.50), and after 4 days reached a low of 107.50, in other words passing down through our P1 profit target of 107.80. At this point we close half of our stake and we then move our stop loss down (because we shorted) to just above Level B.
Now, what about our second half of the trade?
Well, in this case BIDU reversed rather quickly and in fact your second half of the trade would make no profit. However, by taking your P1 profit at the correct level, you're still up on this trade.
My 2-part profit-taking trading plan makes sense for all numbers of reasons, many of which are psychological. But remember the father-son team and what they said. They took their first profits religiously at the P1 profit target or nearer to their entry points. And that's how they made over 1,000% in just 14 weeks.
I'm traveling for the next week or so, but will be in contact along the way.
All the best