If a stock is trending up, it is advisable to hold so as to maximize profits? So if it will corrects, how do you know if it's just a mere pullback or a start of its trends reversal and should sell on a rally ?
So how does one know? There are many techniques to determine it but none can accurately does so with 100% accuracy and precision.
Many books and successful traders will recommend to let your profits run. Others however will suggest to always stick to your targets. The next question could be how to do it? That is, how to make profits run? What are the details to do it? There are many techniques to make this happen. The concepts below will explain some of them.
-First determine the time frame you are using, monthly, weekly, daily or 60 minute time frame if applicable in your market. Remember the definition of a trend, uptrend is when a stock continuous to make higher highs and higher lows (lower highs and lowers lows in a downtrend). As soon as a stock fails to make a higher high or a higher low or both, a trend reversal might be forthcoming and you may want to sell some of your positions or all of them, depending on your trading system. A trend reversal means a stock may go down or go sideways. A technique that some use is scaling in or out in a position in percentages. For example, in scaling in, one may buy a 3rd of the position in anticipation of a breakout, a 3rd on the breakout and a 3rd on the retracement of the stock. You can do the same in selling, sell a 3rd upon reaching your original target (e.g. 20%), a 3rd on the next target and hold the 3rd as long as the trend is not violated. You can make many variations of this technique as to your liking.
-By using the concept of different stages of a stock, determine the stage of your stock whether it is in the accumulation, markup, distribution or decline stage. (basing area, advancing phase, top area, declining phase). Base on its stage, you will have a good idea of how to deal with your stock.
-Using the Elliot Wave techniques can also try to tell you what your stock could possibly behave in the future. Elliot Wave theory shows how many highs and retracements a stock could make in a particular run.
-Fibonacci retracements can also be used as guides to determine the retracements or targets of a stock.
-Trading Chart patterns is also one technique to determine target prices. This is in correlation with the state of general market.
-You can also use the moving averages as guides. For example, if a certain moving average you are using starts to go down or the prices crosses below it, it may be an indication that the stock's trend is starting to reverse.
-Indicators can also help you to try to determine if your stock is starting to reverse. Common indicators are ADX/DMI, MACD, CMF and others can show weaknesses in the stock's trend and a price break of a support or trend line could be your signal that the indicators could be right.
-Determine if a major support is violated. You can determine supports by previous highs (daily and weekly time frame) , moving averages in the daily, weekly or monthly time frames. A break of a major support could signify the start of a downtrend or sideways movement.
-Use a trailing stop. So that you won't worry about giving back too much profit when a stock corrects or starts to reverse its trend. A trailing stop could be designed to allow reasonable corrections so you won't be stopped out early. See the SAR indicator or search about trailing stops. There's a bunch of systems that use this technique from the simple to the complex.
"How do you compute for the correction it should only make, is it from a support of an uptrend line or a certain percentage down from its high?"
-Corrections could be allowed as long as it does not violate the higher highs and higher lows concept of a trend. The corrections can be deep or shallow depending on the behavior of the stock. The scaling out technique can help you preserve profits if you can't give back profits of deep pull backs.
-Use Support/Resistance analysis, Elliot wave and fibonacci techniques to try to determine the range of possible corrections. Try to remember that these techniques are usually tied with money management and trading systems. I don't think they are recommended to be used on their own.
-A break of an uptrend can also be used to sell a position or a portion of a position if that is part of your trading system. A trend line break does not always signify a trend reversal, it could just be a slowing down of a trend.
Is it Advisable to Hold If a Stock is Trending Up?
