Alton Hill is a Cofounder at TradingSim. He has a passion to help people and found that one of his ways of doing so, is through the world of Day Trading. Alton’s skillset is in Product Development and Design Thinking which he uses to write and improve the overall experience for TradingSim.
If you have been trading longer than a few months, you have probably asked yourself this question. I myself have labored over this topic for hours upon hours, yet on the surface it’s such a simple thing.
Well by the end of this article, I will give you my perspective on this question and what has worked well for me when day trading breakouts.
Table of Contents
Why Even Ask the Question?
Before we dig into the what I do, let’s first explore why we even ponder the question. As day traders, your entire job is to make money. While we all have had the stretches where we were just making our brokers rich putting on loser after loser.
The real point of active trading is to turn a profit. Just to be clear, not just a profit, but the most amount of profit per trade.
How do we turn a profit?
What action do we have to take as traders to turn a profit? If you couldn’t guess it, we have to close our position.
That means selling long trades and buying back our shorts.
As you will learn, if you haven’t already, no one and I mean no one has any idea how far a stock will go. I don’t care if you use Fibonacci, Elliott Wave Theory or the best indicator in the world.
We simply do not know what will happen next in the market. This inability to predict the true profit potential will inevitably result in us looking back at our trades only to notice they have gone beyond our exit.
The pain of seeing money left on the table is a close second to an actual loss. Especially when you only need a few big winners per month to turn a decent profit.
So, this is why we ask ourselves the question, it’s just a matter of time and how aggressive we are in our daily goals before we start to look for answers.
Halves, Thirds and by Touch
After you come to the conclusion that there is more money to be made. Your next step will be to start doing things like selling half of your position on the first pop after you go long. You will then hold onto the second half of your position for a loftier target.
On quick glance, this makes perfect sense. You are exiting your trade with a profit, which puts money in the bank and reduces your risk exposure if things go against you on the second half.
This also allows you to take the edge off as well on the second half, so you can sit through the back and forth.
Well, now that we have covered how things work in the academic world, let’s talk reality.
First, while you may take a small gain on half your position for winning trades, for your losers, you take a hit on your entire position. Over an extended period of time, this sort of math does not bode well for your risk to reward ratio.
Also psychologically, you will feel beaten down as your winners just feel tiny compared to your losers. This will only further exasperate the need to make more money per trade.
Next, on the second half of the position, why would you ever want to get comfortable in a trade. When day trading, there is no such thing as letting your profits run.
When a volatile stock hits its turning point, there are no yellow signs flashing. Your winner can easily drop 3% or more in less than a minute.
If you have somehow decided to take it easy on the second position and not worry about things, you will give back the gains.
This brings me to my last point. I would always give back the majority of my gains on the second half of the position. Often times, I would end up exiting the trade near my first exit on the second half.
After going back and forth with yourself on selling half, you might land on the thirds option. This means that you sell your position on each spike or run that goes in your favor.
Again, this sounds great on paper, but when day trading, there is no need to hold onto a stock all day.
Many studies have shown that stocks only trend the entire day 20% of the trading sessions. That means in the course of one month, you will be lucky to have 4 days where stocks just go up or down all day.
So, why not focus on the 80%, where you can get the most amount of profit per trade?
Once you get exhausted with the thirds option, you may land on the “by touch” method. Essentially, you just sell a portion of your position based on how you feel about the market.
If a stock is going really well, you may sell in quarters. If you do not like the price action and things feel too risky, you may sell out of your position in halves.
The problem with this approach is that it is not consistent. The one thing I know about the markets is that you have to approach each trade exactly the same way. Once you start opening yourself up to taking any opportunity, or trying to form your thoughts so it accounts for every scenario in the market – you might as well hang it up.
So where does this leave us?
Sell it All
Got it? That’s right folks, sell the entire position. If you feel something is wrong in the trade, or that you need to take your profits, why not just sell it all.
Take that in for a moment and try not to react.
Let me be crystal clear. I have made the most money when I exit the position the minute I feel things are either going too well or just don’t feel right.
I don’t worry about the money that I would have made if I had held on. I am thankful for the money I have in my hand.
Not to mention, I am now in cash, ready to jump on my next opportunity.
As a day trader you have to remember you are not married to a stock. You are not looking to essentially do a buy and hold for an entire day.
You make money when you are in the stock with the greatest profit potential.
That does not mean greatest profit potential over the course of the day, but the greatest profit potential at that point in time!
As a day trader, we have to learn to live in the moment and not worry about what the next hour, minute or second will bring.
The other item for you to remember is that you also have a clear mind when you close the position. I’m not going to go down the “trading is stressful” rabbit hole. But I will say that trading requires an enormous amount of focus.
If you are not focusing when day trading, then you have yet to reach your true potential.
This level of intense focus takes the mental strength of a normal eight our work day and condenses it down to one or two hours.
In order to maintain this level of focus, you do not need the additional headache of a third of a position still floating around out there, while you are in the process of opening a new trade.
Just Because Everyone Else is Doing It Doesn’t Make It Right
After you read this article, I can pretty much guarantee you that every post or YouTube video you watch will show you people selling a portion of their trade.
While I am not here to say my method is the best, because I truly believe that any method, if perfected can turn a consistent profit in the market.
I am just here to lend a voice to those of you out there that are uncomfortable with selling pieces of your position.
It is ok to be totally uncomfortable carrying $2,500 dollars of a $10,000 position. It is totally ok to question why you are holding on to that last quarter of your position, in hopes of letting it ride all day.
There are other options out there and simpler ones (i.e. just sell the entire position).
See for Yourself
At the end of the day, you need to assess which method puts the most money in your pocket. Over thousands of trades in both Tradingsim and my live account, I have been able to prove without a shadow of a doubt, that I make the most money when I sell the entire position.
Not only do I make the most money, but I also make the most amount of money consistently.
That’s one area I forgot to cover in more detail, the mental pain of losing.
When you sell that second portion of your position at a lower price than the first half. Even though you are still net up on the trade, on some level it feels like a loss. You never remember how you feel when you close the first half, you just remember the pain of the second half.
My friend, if you haven’t realized it yet, losing in the markets can be very painful if not kept in check. If you don’t think so, try executing a system that’s 40% right, but profitable on paper and see if you can turn that profit.
Remember, we are human beings not machines! No one likes to feel like a loser day in and day out.
So, with all that said, selling the entire position will get you in the rhythm of winning which is critical for successful trading.
You will need to find out what exit strategy works best for you.
For the active day trader, that specializes in breakouts, selling the entire position definitely put me on the path of success.