How to Manage Winning Trades

This stock trading question about winning trades comes from Jacob G. whose #1 challenge is…

“My challenge is managing winning trades and knowing when to close a winning position…”

This is a very common question, mainly because there are various psychological issues at play. The fear of giving back existing profits is probably the most notorious one we struggle with.

If you haven’t done any testing, then I’d suggest you do so, either using computer software or, as a minimum, by hand. Testing will allow you to understand what is known as Maximum Favourable Excursion (MFE) and from there you can discern the efficiency of your exits.

For example, let’s assume you buy XYZ at $10 and it moves to $15 before reversing and stops you out at $12.50. The MFE in this case was $5 ($15 – $10) and your efficiency was 50% because you only caught $2.50 of the available $5. Once you have a significant sample of data to use as a benchmark, you can add an extra exit rules to accommodate.

Assume that for all trades the MFE is $5, then once a trade shows a $5 move in the right direction you tighten the stop right up so you don’t give back all the profit. This will improve your trade efficiency. Or alternately, when the stock has run $5 in your favour you may build in a rule to exit half the position, because probabilities suggest the move is becoming exhausted and reverse.