Year 2020 has been a year of unexpected challenges. Interestingly, it is also a year of opportunities for the stock market. Recently, a friend asked me how to take profits in such an unpredictable market? Yes, we are in a bull market, but the incidents that occurred are unprecedented. From public health, social and economy to natural disasters, geo-political and all the challenges on Earth; it’s all happening concurrently and are escalating!
As we look back, it has been over eight months since the first COVID-19 case was discovered. Yet, the pandemic has not ended, and is still rising. At the time of writing, over 15 million of the population have been infected and more than half a million people have died. The recent rebound cases in the US have forced leaders in California, Florida and Texas to return to stricter lockdown measures. This makes investors wonder how the economy would recover if people are indoors. Anyway, the stock markets behave differently. Perhaps, the market reckons that things could get better in the longer term, as the Dow Jones Industrial Average (DJIA) tells us.
As we can see the DJIA chart on 14th July 2020, the candles have broken above the golden line (MA200) after consolidating for nearly a month. Moving forward, the index is closing the two big gaps that formed early June 2020. Should it succeed, the next resistances are 27000 followed by the 27600 level. As the index is going up, there is one caution: gold price is rising, too. Traditionally, gold is a safe haven when the market is unstable. Rising gold price means investors have sensed higher risk, hence have parked their funds in gold. Gold price has moved above 1800 since 7th July 2020. It looks like the uptrend for gold would continue. So while we are in the bull market, with many uncertainties ahead, how would you take profit?
How to Take Profit in this Market?
Taking profit is never easy, as not only it involves strategy, one need to manage his emotion. In this part, we will discuss the strategy.
If you buy to invest, only consider taking profit when the business has become overvalued (or reached its fair value). However, if you buy to trade, you need to set loss-cutting point before setting a profit target. You see, most people lost money because they only think how much money they want to make, and not the downside. Let us always ask: how much I can afford to lose in this trade – 5%, 10% or more? This is risk management, which is essential but most people have neglected it. Once you have taken care of the downside, you may consider the upside.
Set Profit Target
There are at least two ways of setting a profit target.
First, you set base on a percentage of return. If the market is unstable, make it lower (5-10%). It could be a rebound play. If the macro has turned more stable, increase it to 10-15%, or more. You can adjust it based on the market sentiment and your own feel. Second, look at the technical chart and observe the support and resistance.
Identify Support and Resistance
You might have heard of ‘buying low and selling high’. It sounds very simple, but for one to do so, he needs to buy at the support and sell at the resistance. There are at least six signs for us to see on the support and resistance such as previous highs and lows, moving average (MA) line, gap, Fibonacci line, prolonged similar price range and a round number.
In addition, sometimes you would notice some resistances would tend to coincide with each other. For example, you bought counter A at 1.2 and noticed the previous high is 1.5, it is likely that the potential resistance is at 1.5. Besides, you also discover that the moving average line of 50 (MA50) has appeared near 1.5. Moreover, 1.5 is a round number. If so many signs that have coincided at 1.5, it is likely that 1.5 is a strong resistance. Therefore, you may consider setting 1.5 as your profit target.
Taking profit is an art, especially in nowadays market. For one to master this art, he needs to have a clear mind, and be able to let go when the timing is right.