No matter how skilled you become at trading stocks, you will never perfectly time your buying or selling on every single trade.

You’ll book profits too early. You’ll hold a stock too long and watch some of your gains vanish before finally pulling the trigger. Or you might even pay too much for a stock that beings to pull back before shares finally break out.

That’s just a fact of trading. You can’t predict every tick the market makes…

Instead, you must approach your buying and selling with strategies that fit your investing or trading style. You won’t get the very best price for your shares down to the penny. But you can certainly improve your overall results by eliminating the major mistakes that can potentially cost you hundreds of dollars.

Many of you have written in since last week with questions about various buying and selling methods I’ve detailed in these pages. So I wanted to take the opportunity today to expand on some of my tips from last week’s Playbook and help you incorporate some of our trading and trend following techniques into your personal strategies.

Let’s get to it:

In your article, you suggest if you get a gain of 8% in a few days, take half the position off to help you control your emotions…I like that.  My question is on the buy side, do you buy all at once or buy 1/3, after 2% gain, buy another 1/3 and the last 1/3 after another 2% gain?  Any comments would be helpful and appreciated.

–John

One of the selling strategies I’ve discussed recently involves selling half your position once it has reached an initial price target. Once you have booked gains, you are less likely to let your emotions override your mental stop-loss if shares begin to retreat.

But selling half your position once a stock posts quick gains is only one small part of a selling strategy. You can adapt my idea to better suit your trading needs. I’ll explain in a second…

First, what you’re describing looks like it could be interpreted as the opposite a philosophy where you average down on a losing position.

[Editor's note: Longtime readers know how I feel about averaging down...

By purchasing additional shares when one of your positions moves lower, you might have lowered your average entry price-- but you've also paved the way for additional losses. I know averaging down is what every financial guru tells you to do. You sit on your hands and stick to your belief that the stock will eventually go up. But in my mind, averaging down is throwing good money after bad. Instead of improving your situation, you’re tying up even more money on a losing investment.]

Instead of averaging down, John is advocating buying shares in smaller increments as a stock moves higher.

That’s fine if it’s what works for you. But here are a few things to keep in mind…

For one, don’t forget about commissions. If you’re paying a flat rate per-trade, your commission costs are going to be significantly higher if you’re splitting up your buying. Instead of two transactions (one buy and one sell) you’re potentially paying for at least four (three buys and one sell). Obviously, doubling your expenses is going to hurt your overall profits.

Also, I’m not sure about arbitrarily buying more shares after a certain percentage gain is met. Instead, you should consider buying additional shares at technically significant levels.

Here’s a slightly modified strategy that could work nicely:

You buy half your intended position on an initial price breakout. Then, once you receive additional confirmation, you complete your transaction by purchasing the second half of your position. You can use whatever confirmation method you prefer. To keep things simple for this example, let’s say your strategy is to buy the second half of your position once the price extends 4% above the initial breakout.

This method will help optimize your gains for a couple of reasons. First, you are risking less capital on the initial breakout. Therefore, if the breakout doesn’t hold or you are stopped out in a whipsaw market, you are effectively cutting your losses in half. On the other hand, if a breakout move strengthens, you will have the signal you need to go “all in” with a full position, helping to maximize your potential gains with less risk of getting stopped out. It’s a win-win.

What’s important about this technique (and all of your buying and selling strategies) is that you need to make a plan before you trade. You can’t wing it and expect everything to work out in your favor. The market is unforgiving– approach your trades with a set plan and stick to it!

I have other questions about buying and selling that I wasn’t able to cover today. I’ll be back Wednesday to finish this discussion. I’ll also share some new selling tips. Stay tuned…

Sincerely,

Greg Guenthner, CMT

This issue was originally published in Trend Playbook. Trend Playbook Agora Financial’s newest FREE e-letter designed to help you pull consistent gains out of any market.

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Related Posts

• September 26, 2012 -- Your Best Buy/Sell Strategies, Part 2
• February 1, 2013 -- Trend Following: Don’t Think, Just Buy!
• September 21, 2012 -- Your Trend Following Questions – Answered!
• August 29, 2012 -- Two Ways to Play an Early Trend
• September 5, 2012 -- 3 Keys to a Well-Timed Sell

Greg Guenthner

Greg Guenthner, CMT, is the co-editor of STORM Signals and Penny Stock Fortunes. He is also the editor of Agora Financial’s Trend Playbook, a free resource for trend followers and technical traders. For close to a decade, Greg has led Agora Financial’s small-cap division, where he founded one of one of the only independent OTC research advisories in the industry. Greg specializes is classical trading techniques and combines timing strategies with his fundamental analysis of small-cap stocks.

He is a member of the Market Technicians Association and hold the Chartered Market Technician designation. 

View articles by Greg Guenthner