I’ve traded enough booms and busts over the last four decades to know that markets don’t go in a straight line forever.
Stocks right now are behaving as though nothing can go wrong. Even the pullback from last week’s highs saw buyers rushing back in earlier this week.
But the market is facing a whole lot of issues…
Oil looks set to break out to new highs, and inflation continues to rise. That means the odds of a rate hike are growing by the day – though the Federal Reserve seems more and more trapped.
Plus, the AI theme is again dominating the market’s move. This rally is based on just a handful of stocks.
Yet folks keep bidding the market higher. Despite sitting on profits, they’re showing no signs of wanting to sell. They want to ride this thing forever.
That’s a problem. Too much greed could see those profits disappear in short order…
What makes this market different from other bubbles I’ve seen is how hungry people have gotten for ever-bigger wins. People won’t take a profit even if they’re sitting on double- or triple-digit gains.
However, learning to bank profits is critical to your long-term success.
Most folks are familiar with stop losses. They provide a clear-cut exit to sell a position at a specific level. They help avoid a manageable loss turning into something much bigger.
But when the opposite happens, many people have no clear plan about when to exit their winners. That can be a huge mistake.
Because if greed overcomes good sense, then you’re going to kick yourself when the bubble pops.
As a trader, you must take profits – even if it means leaving some money on the table.
While missing out on even bigger gains can be frustrating, it’s nothing compared to watching a profit turn into a loser. That can really mess with your head.
Do you hang on in the hope that the market comes back your way? Or will you face the frustration of selling a previously profitable position for a loss?
Not only does that dilemma distract you from other trades, but it also ties up your capital in a trade going nowhere.
That’s why I’m not afraid to take profits. I see each profitable trade as a win on the board.
Some people decide to close a trade at a fixed percentage gain or a certain multiple (50% or 3X risked funds, for example). Others simply use a time-based exit.
No matter what your exit strategy is, you need to bank your profits and keep your capital working. After all, you can always re-enter a trade if another promising setup occurs…
While it’s tempting to focus on the entry part of trades, remember that a trade isn’t completed until you sell. You must have a clearly defined exit – for losses and profits.
Those who don’t follow this simple yet critical advice will be kicking themselves when this market inevitably rolls over. And that could happen sooner than you’d think…
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
