Imagine this scenario.
You have accurately picked the bottom in the stock market and have bought a lot of stocks. So far you are doing very well in this short term swing trade. The question now is:
Where do you start to take profits?
Did you know that the SPX or the S&P 500 index can influence the direction of stocks? If you do, then you will know when to start lightening your positions. In other words, you know when to start taking some serious profits off the table.
This article will show you when to start taking profits for short term trades.
Today, you will learn one of the many stock market secrets.
The secret of when to start taking off positions for short term trades.
Since 75% of stocks follow the direction of the major indexes, it is very important that you study the price action of the S&P 500 index. One of the times to start selling your positions is when the S&P 500 index hits a resistance.
If you are not sure what resistance means, perhaps you should take a look at the introductory article to support and resistance.
The chart above shows the SPX or the S&P 500 index with resistance areas. Prior highs can be resistance areas and if you are buying stocks for a short term trade, then it is wise to think about taking some positions off the table when the SPX hits resistance area.
For many traders, they prefer to use the SPY. The SPY is an etf that tracks the performance of the S&P 500 index. If you are taking short term positions, you can use the 60 min chart of SPY to time when to sell your positions.
The chart above is the 60 min chart of SPY.
If you are a beginner, you will probably not come across 60 min charts. Your staple chart is the daily chart. However, many professional traders like to use the 60 min charts to find trading candidates.
The 60 min charts are not too long and they are neither too short. It is somewhere in between and they are perfect for traders who like to catch 2-5 days rapid trend movements in the stock market.
So if you do not wish to stare at the market all day or you do not want to wait for weeks and weeks to capture profits, the 60 min chart is excellent to find swing trading candidates.
Normally, you can find the best time to buy stocks when the SPY breaks above a 60 min trendline or when it is at support. Once you have entered many positions, you should start to be on the lookout for resistance areas in the 60 min chart.
In the chart above, let's say you begin to enter stocks around the 29th and 30th. You will notice that SPY had a nice 3 day rise and then it hit resistance. This period is the sweet spot where many stocks will go up rapidly and give the trader a nice 3 days swing trade.
When SPY starts to hit the resistance area, the professionals will start to think of selling and taking their profits off the table. The amateurs on the other hand will be so excited that the market has gone up a lot and they will start to go into stocks. The next day, you can see how the SPY had a rapid correction and traded sideways for a few days.
During this period, if you don't take profits, you will notice many positions in your portfolio will have the profits go down tremendously. Some may vanish and hit your stop loss and cause you to lose money.
The word "short term" should already give you a hint why you should take profits as soon as possible.
Short term trading can be lucrative.
But if you take too long a time to take your profits off the table, then you might lose all the profits. Worse of all, your profits might turn to losses. Which is why short term trading is not suitable for most people. Profits can evaporate just in a twinkling of an eye.
That is also another reason why some people are better off with investing. If you take a longer term approach, you can take your own sweet time to take profits off the table.
Learn as much as you can about the concept of support and resistance. Now that you know that resistance areas in the main index like the S&P 500 can have a huge impact on the direction of stocks, learn to spot them. It will help you to keep the majority of your profits and avoid big losses.
Charts with the Freestockcharts.com label are courtesy of Freestockcharts.com
Charts with the investing.com logo are courtesy of Investing.com powered by Trading View
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