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Why Your Pockets Leak Profits

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Written by Timothy Sykes
Updated 5/31/2022 5 min read

I always felt like I was leaving profits on the table in my early days.

After all, I was trading high-flying penny stocks. And sometimes, they’d shoot up 20%, 30%, or even 50% after I sold them.

Every trade seemed to have its own woulda, coulda, shoulda moment.

What a waste of time!

The truth is you’ll never get out at the top. And there’ll always be some meat left on the bone.

So instead of beating myself up, I started to do one little thing that changed everything.

It kept me focused, my gains were consistent, and my profits shot up significantly.

If you’re able to implement this one strategy, I think it could be a difference-maker for you.

Today, I’ll show you how it works and two ways you can implement it.

Selling Into Strength

The best traders I know buy into weakness and sell into strength.

It seems easy enough on its face.

Yet, not everyone knows how to do this.

That’s why I use price action – the relationship between price and volume – to determine when a trade is over.

You see, when I see a stock that’s been raging higher suddenly hit a wall of volume and slow down, I know that buyers have lost a step.

It’s at that point that I want to exit my position.

Similarly, when volume starts to pick up and price is starting to rally, I can use that as an entry point for my trade.

Here’s two ways I could accomplish this.

Method #1 – One and Done

This method is pretty straightforward and the one I typically use.

Quite simply, I pick one price to exit and take off the entire position.

To do this, I look to see when momentum is waning in a stock.

Here’s an example using my trade from Tuesday morning in Mullen Automotive (NASDAQ: MULN).

On this one-minute chart, I noted where I bought and where volume began to increase as the stock approached the high of the day.

I then used that momentum to ride the stock for a break over that high.

Next, shares popped on heavy volume, and a large green candle. This is where I sold my position into strength.

I saw the price continuing to climb, yet the volume began to fade.

That’s when I decided to exit the trade.

However, there’s another method I could’ve used known as ‘scaling out’.

Method #2 – Scaling Out

Scaling out works exactly like it sounds.

Instead of selecting one target, I exit in pieces along the way.

For example, in the MULN trade, I entered at $1.23 and exited at $1.34.

Scaling out, I might’ve taken 50% of my position off at $1.34 and tried to take the remainder off at the round $1.50 mark.

Traders also refer to this as locking in profits along the way.

Once I take profits, I never want to let the trade go bad.

It was one of the first risk management techniques I learned that helped me move from losing money to becoming a profitable trader.

So, in almost every case, after my first exit, I will stop out back at my entry point, whether I use a stop loss or do it manually.

Now, a lot of people want to know the best way to find those prices when I scale out.

There isn’t a specific percentage or dollar amount that I’ve seen work consistently.

Instead, I can use price action to look for multiple spots to exit a trade.

Going back to the chart of MULN, there’s another area where I could’ve taken off additional shares.

In that white box, you’ll see that price started to trade sideways on declining volume.

I could’ve used that as a secondary signal to exit the trade.

Similarly, the stock peaked around $1.43 on declining volume.

That could also act as a signal for me to exit the trade.

Now, I could also try to align these exits with resistance levels. That’s a perfectly good option as well.

And when I get price action at a resistance level, it’s like getting an extra loud signal.

The Bottom Line

When I exit my trades, I want to lock in profits as the stock rises. I prefer not to wait until it turns around before exiting a trade.

I know some traders prefer to do this.

However, especially in this market, I want to take a more conservative approach and preserve capital rather than risk it.

—Tim


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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (205) 851-0506 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”