By Will Kraa
Taking profits that are smaller than the amount risked for the trade is not my habit. Sometimes however it may be an advantage to take a small profit in order to make the most of a better opportunity.
Most traders have come across the saying, ‘You can’t go broke taking a profit’ and I guess most of us know that this is a dangerous myth. It’s very easy to have several small profits wiped out by one large loss. This is common mistake of most inexperienced traders, quickly grabbing profits and not being able to take a loss and letting a loss grow large enough to destroy the profits. It is true that even experienced traders can make this mistake from time to time since this is a matter of psychology, not just experience.
So it is necessary to ensure that any trade makes a profit large enough to be worth the risk that was taken in order to generate the profit. While acknowledging this, there may be times when taking a small profit is justified. Just make sure this is not used as an excuse for bad trades, ones where a profit was taken but the rules not followed.
On Monday morning 10 August I was looking for a short term trade and noticed that CFX (CFS Retail Property) was in a short term uptrend (see red line on the chart) and also that it had been trading in a range between $1.70 and $1.81. Therefore a suitable stop was at $1.69. Trading on the day indicated that it could be bought at around $1.73 and with the stop at $1.69 the risk was 4 to 4.5 cents per share. It also looked like a profit of 8 or 9 cents per share was possible over the next few days. The market as a whole was also in an uptrend so I decided that I would take the trade.
I was willing to risk around $2000 for the trade so that meant I could buy 44,400 shares. The total size of such a trade would then be $77,000 but I had only just over $50,000 available for this trade so I had to pare it down to 30,000 shares which I was able to buy at $1.735. This meant that the total risk was now $1350.
Later in the day it became obvious that it would have been possible to buy at a lower price but next day things went as expected and the day after (12 August) it had reached $1.77 but still short of my target at over $1.80.
By now, even if I moved my stop to near breakeven I was risking 4 cents for a likely short term profit of 4 to 5 cents and so I decided to see if some better opportunities were on offer.
WSA (Western Areas) is in a long term uptrend and offered short term support at $5.75 as shown on the chart. At the same time the market was very bullish on metals and this miner looked like a good short term opportunity. If I could buy near $5.80 with a stop at $5.70 and a target over $6.00 then that was a better proposition. But to do it I needed the capital currently being used by the CFX trade. Accordingly I decided to sell CFX and buy WSA.
CFX was sold at $1.77 and WSA bought at $5.80. With a stop at $5.70 and again risking $2000 I would have been able to buy 20,000 shares but that would have cost much more than the cash available from the CFX trade. I therefore bought 9,000 of them at a total cost of $52,200 and risking $900.
Two days later on Friday 14 August the price was well over the $6 target, the market had risen so much that a retreat was more likely and a very good profit was on offer. In the afternoon I decided it was time to sell and was able to do so at $6.32 near the high for the day.
The profit for the CFX trade was only $1050, less than the amount risked but the profit from the WSA trade was very much better at $4680 for a risk of just $900. Brokerage for the trades totalled $132 (my broker charges a flat $33 per contract) so the total net profit was $5598. I did not use CFDs for this since my CFD account was being used for other trades and for these very short term trades I like the low brokerage. The sum of $52,000 was used for the trades, making a profit of over 10% in a week. With the market so positive it was a very good time to trade. You have to make hay while the sun shines and look for the most probable source of profit.
Buy 30,000 at $1.735 = $52,050. Risk per share = 4.5 cents. Total risk 30,000 x $.045 = $1,350
Sell 30,000 at $1.77 = $53,100 Profit $53,100 – $52,050 – $66 = $984
Buy 9,000 at $5.80 = $52,200. Risk per share = 10 cents. Total risk 9,000 x $0.10 = $900
Sell 9,000 at $6.32 = $56,880. Profit $56,880 – $52,200 – $66 = $4,614
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