So you found your A+ stock setting up, it's in the upper right hand corner of it’s daily chart, it has been consolidating for some time now, you know where you want to buy, and you know where to get out if you are wrong. Now the million dollar question is where the fuck do you sell this thing when you’re right? You’ve heard it a million times, hold your winners and cut your losers. However at some point you have to sell your winners, right? Yes you are right, at some point we have to sell our winners. Now usually the longer you hold those winners the better they pan out (until they do not) and we will go over two trades in particular where we sold too early and held too long.
“We are what we repeatedly do. Excellence, then, is not an act, but a habit .” - Aristotle
Before we jump into those two trades let's set some strict fucking ground rules. For any trade you put on, the target is at min 5X your risk, keyword MINIMUM, none of this mickey mouse shit where your target is 2:1 risk reward or any of that piker stuff. If you risk $1 per share, you’re aiming to make at least $5, if you're risking $2 you’re aiming to make $10. So the most basic target is as follows:
(Click on the chart for a bigger version)
This shows you your risk reward (how to use this tool on tradingview below) which is a good, god I hate to use this word, it’s a good tool to use. Makes me cringe saying that word, new traders fucking love tools, however this is one that will help keep you focused on the bigger picture. So as we mentioned to start each trade you should always be aiming to make 5 times your risk.
Risk $1 per share aim to make $5+ per share
Risking $100 in the trade aiming to make $500+ per trade.
You get the picture. Now there are times when you can't always get 5:1 of course, we are realistic and know that sometimes, you might only be able to squeeze 2, 3 or 4:1 out of a trade, however those are exceptions to the rule. If they are happening more often then you’re not following the rules.
Now let's dive into two trades, to show you the reason why you should have targets and they are not set in stone.
(Click on the chart for a bigger version)
NKTR was a Big Picture Idea that we will break down further in the Risk Elastic lesson later on, however for now the topic of discussion is targets. This Big Picture trade had $1 of risk from the $25 entry with the target at $52 which is over 100% higher. The risk reward on this trade was over 27:1 and is currently 300% higher from the entry. Trust me these trades are extremely rare, and you will see how I botched this winner later on. However you can see that prior to this triggering, most (including myself) figured it would have taken a year for this stock to double, yet it only took 9 days and since then is still ripping higher. This is why it’s a target. We are aiming for a certain price, however as the stock trades we find out if it was realistic or if we need to be more patient. In this case, holding out longer was the smarter choice. Again with a big fat ‘easier said than done’. I made 65% in this trade and it looks so pussy now in hindsight when it’s now a 300% winner. More on that later. Now we are going to move onto a swing that currently I'm stuck in because it exceeded my target yet I never sold.
(Click on the chart for a bigger version)
ONCE was a swing that we had our eye on all last year and we caught it for an over 40% move from $60 to above $90. I didn’t take profits and as we are starting to become more aware, just as fast as they go up, they tend to come down even faster. There are a few key takeaways from this. Huge gap down was on earnings (same reason why we said avoid holding through earnings) and for every winner that you sell too early, it’s another trade that was a paper cut that could have turned into a disaster.
I am going to have to be extremely patient this ONCE and tie up capital for a much longer period before the mood of this stock turns around in my favor. So remember for your target;
Step 1: Aim for 5X your risk.
Step 2 : After the trade starts to show that its a winner (5%+) you cannot, I repeat, cannot lose money in the trade.
Step 3 : Avoid earnings as long as you can.
Step 4 : Rinse and repeat Steps 1-3.
