The Most Important Profit-Taking Lesson of 2016 (and 2017)

"Bulls make money, bears make money - pigs get slaughtered." -- Old Wall Street saying

Throughout my life, I've had so many good mentors. At home, I had parents who showed me how to love unconditionally, who taught me the value of a buck, and how to have fun. At school, studying to be a chemical engineer, I had teachers who taught me how to think outside the box.

And when I moved into the corporate world, I had brilliant women and men help me understand how to use all the resources around me to get really big things done.

And in the trading and investing world, I've been fortunate to have sage people help me understand the psychology of how markets work.

That's right - the engineer just said "psychology."

At their purest level, financial markets are just auctions. Multitrillion-dollar auctions - but auctions, nonetheless.

Which brings me to today's "lesson." It's hands-down one of the most valuable profit-taking techniques that I've learned in my 30 years in the markets, and I'd like to share it with you.

It Starts with the Psychology of Managing Winning Trades

I find that for almost everyone, this is the toughest part of trading.

Here's the reason. The "Golden Rule of Trading" says that we have to cut our losses short and let our profits run.

Fair enough.

But when we're in the middle of a big winner, the question becomes, "When do I take profits?"

If we take them too soon, we could miss out on that occasional "whale" trade that can make our whole week or month or even quarter.

And for the person who finds it easy to hang onto a winning trade, the problem becomes hanging on too long... and giving back much or most of those profits.

The Stealth Profits Trader answer is to grab profits in stages. This helps us handle the psychology of taking some healthy profits early in the trade and then hanging on to catch those occasional monster moves.

But there's one aspect of many monster moves that most people miss: The final blow-off.

Traders often give back too much profit because they can't recognize the final stages of an extreme move.

I call it the "blow-off move." Here's how you spot it and what to do when it arrives...

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The Blow-Off Move Is Critical

Short- and intermediate-term traders must learn to recognize the one "key" for blow-off moves.

Let's look at that key on two of my Stealth Profits Trader winners on Chipotle Mexican Grill Inc. (NYSE: CMG) and United States Natural Gas Fund LP (NYSE Arca: UNG), where we pulled in 389% and 305% wins in the last two and a half weeks.

Here's the Chipotle chart first:

profit-taking

 

Now let's zoom in to a shorter time frame to get a closer look at those last few days and see how to recognize blow-off tops:

profit-taking lessons
When we get a crazy steep up-slope, especially after a prolonged up-move, take it as a sign of a blow-off top.

The stock has just moved too far, too fast. It can't sustain that move.

The same thing happened in our US Natural Gas Fund trade. First we'll look at the trade progression from a slightly longer perspective:

investing lesson

Now we'll look at the 24-hour chart of the natural gas futures to see the area inside the circle above:

investing lesson

Once again, after a great multiple day run-up, we get a blow-off extreme slope showing that the market has moved too far, too fast, and has to pull back to take a breather.

And so we were content to get out of two great trades with a couple of monster wins by recognizing when a monster move was hitting an exhaustion point.

So here's how you nail it, every time:

When you see a blow-off move headed in your direction, be content to take your fair share of profits. Don't try for "perfect form" and sell at the top.

But take whatever you do - take those profits before they evaporate. That's the upshot of the old chestnut I opened with, "Bulls make money, bears make money - pigs get slaughtered."

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About the Author

D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.

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