How To Keep Profits
Systematic Approach To Taking Profit Day Trading
Welcome Traders, To Another Installment of JWJ Newsletter’s Private Blog, where I post highly valuable educational content for our readers every month.
In this post, we will be focusing on how to take profits systematically, how to prevent green trades from turning red, and how to let trades run their course without interfering in a good position for large gains.
Once you have learned how to properly manage your risk in the market, which is the #1 priority for any consistently profitable trader/investor. The number #2 focus now shifts to, where am I going to pay myself once the market makes it available.
If you are struggling with #1 please take a few minutes to read my blog on understanding how to measure risk and mastering it in any trading condition.
Once you have mastered Risk and come to terms that you can not avoid Risk while trading and investing you should understand that keeping a low risk entry is vital to trading, however this does not make traders money.
It is vital to understand that millions of traders alike make money trading in the stock market, when you first started trading, whether it was options, stocks or any financial instrument, it did not take much luck or skill to put on a winning trade, some of you reading this may have been green on your first trade ever, and then it was a roller coaster from there on out. Why is this ?
To illustrate my methodology on taking profits I will use an example similar to our Risk Management.
Whenever I take a position or speculate on the price of any asset, I am looking at two things.
1. How Much Am I Willing To Lose - This is by far the most important thing in trading, you must calculate and define your risk prior to entering the trade, whether this be a 10% stop or 50% stop.
The stop will change depending on a few variables, for one being volatility, in times of volatility you do not need a lot of principal to make good returns, we know this just from this entire 2022 trading year, the market has been nothing short of volatile, and if you are oversizing OR not calculating your risk prior to a trade, you may be in for a whipsaw of action.
This applies just as much to investing if not more than trading. Most investors are “in for the long run”this is a terrible outlook on investing, if a stock is underperforming in a downtrend I do not want to own it, because consider this, for example if you are down 50% on an investment, you require a 100% rally to break even. So Defining Risk Matters.
2. Once The Market Goes In My Favor How Will I Protect My Capital - Good Traders rely on the House Money to take their positions to those 100-200-300% gains, very few traders that trade with size will tell you it is difficult and damn near stupid to let a full position run all day and not take profits. So this is where the profit taking strategy comes into place.
Let me be the first to tell you, when I see money being made on my screen that qualifies as payments for mortgages, groceries for a month, or extra vacation/spending money, I take it, without question.
Why? Because Traders do not get paid for their time, they get paid for their decisions and whether or not you agree or disagree the market doesn’t care. If you are up 50% and refuse to take profits because you believe you will squeeze out 80-100% that is just when the market decides to reverse back to your entry point and leaves you at risk for turning a green trade red. DO NOT LEAVE IT UP TO THE MARKET.
If you are a Boxing/MMA fan and are reading this, there is an old saying that goes “Never Leave It Up To The Judges Scorecard” For those that do not understand, this implies that it is better to knock out your opponent than let the Judges decide the winner of the fight, many fighters who may have been thought to “Win” the fight but lose on the scorecards at the end.
So do not leave it up to the market to decide whether or not you make a profit, leave it up to a profit taking system, and with that here is my profit taking system, this system helps insure that I never let a green trade go red, I never average down (Losers Average Losers) and most importantly I take profits when the market makes it available.
Important
Now it is important to realize options are nothing like equity and futures, options have time decay (theta) and unless the position goes in your favor within a few minutes/hours depending on the expiration of the contract, you will notice what is called Delta (+/- Premium of the contract for every 1$ move for or against your position) If you bought 1 AAPL 160 C @ 1.00 and the Delta is .27 then when AAPL trades from 160 and is now 161 your options contract will be worth ~ 1.27 given Theta has not eroded the Delta on the contract.
Futures are straightforward +/- directly from the entry point of your long/short, there is no Delta, Theta, or any internals that directly affects the future contract. The same applies for equity. So the profit taking system works better on instruments that are not affected by the greeks as they are for options traders, which is important because if you are trading options you want to be able to take profits even faster on those massive breakouts and rallies before the stock consolidates. I am not going to go in depth on the greeks of options, if you need more information on options and why they move the way they move, there is plenty of information in the JWJ Education Tab & on our Youtube.
JWJ Profit Taking System
Now, let us assume we are about trade the Monday Open: Below is a 5D:5M chart of AAPL on Monday 04/18/22
Looking at this chart, you may say J$ how the hell am I supposed to make money on a ranged session for AAPL, the stock opened just below 164 and closed just above 165, looking it on a larger time frame, most would not have saw the potential, however bring your time frame down to a 5 or 10 minute candle and you will see many entry points and calculated low risk entries, they appear on almost every single chart with good volume and ATR (Average Trading Range)
Now I have not added any levels or marks on my chart, now the reason I have not is I want you (the trader) to take a look and imagine where you would have went long or short, given you could not see the remainder of the trading session.
Now I have lowered this to a 3m Chart to show you precise levels and entry/exit points. Just based on the chart itself, most traders would consider this bullish for two reasons
1. AAPL is consolidating above the VWAP and has yet to make a NHOD or NLOD.
2. AAPL has formed a pivot low @ 164.15 = signals that higher low is put in and this is my stop loss if I am to get long AAPL.
The Lowest Risk Entry is any touch of 164.15, if you got in AAPL C @ 164.15, then your risk could either be
A. 164.15 (Entry)
OR
B. LOD @ 163.57
Remember you do not need Flow or some crazy indicator to tell you where the price is going next, no indicator besides PRICE can tell you that anyhow, so no need to go looking for a hidden truth that does not exist, learn to read the chart while it is in motion, what information is present, not what you want or think to happen.
Now that I have entered AAPL, lets say I got long with the 165 C with 5-10 DTE (Day Till Expiration) Below is an options graph of the AAPL 165 C 04/22 Exp
Near our pivot low of 164.15, the 165 C was trading for 2.07 - 1.91 being the LOD for the contract on Monday 04/18.
Let’s say we have an average of 2.00 a contract given we entered near the pivot low on AAPL. My Risk is calculated, I know if AAPL breaks and closes below the pivot low, or breaks the LOD on the contract, the price of AAPL may continue to trend to the downside, very simple risk upfront and you can let the trade pan out.
The contract never closed below our pivot low OR the LOD on the contract, and AAPL actually held the VWAP and rallied into the HOD.
Now Once the price cleared the HOD, options premiums jumped from 2.00 near pivot low, to a high of 3.22 +61% on the 165 C in under 45m.
Now you know how NOT to get shaken out of a good trade, stops @ LOD or most recent Low, if it never gets there your focus shifts to “Where Do I Take Profit”
Well if you are me, you want to scale out 1/3 or 1/2 on a test of HOD, in this example AAPL just clears the HOD, on that one large green candle after a short consolidation under the pivot high @ 165.69
We must keep in mind the 165 C is now ITM and Delta is rising as premiums jump into the call, this is where we want to sell, into strength.
My first scale would be on the break of HOD where premiums saw a big jump, from 2.6 to over 3.00 a contract in just 3-5 minutes, this is a 15-20% gain in under 10 minutes, this is a no brainer scale out and I must take profits once made available, if you have a small account and can only afford 1 contract, the best case is to leave a tight trailing stop loss of 15-20% on the contract and let it run until you are either A. Happy with the profits to take or B. You get stopped out in profit.
For those that do not know what a trailing stop loss is or how to use it, please watch our YT video linked below.
Now once you have scaled out 1/2 your position, say of 10 contracts, you must leave a stop on the remaining contracts, that stop is subjective, for me I usually keep a wider stop if I believe we will have a trend day, however if market internals look weak or unsure of their next move, I will keep a tight stop or just take off the profits on small pops. The second your contract breaks down, in AAPL case it lost the HOD pivot it broke out and tried to hold in the morning, this results in a retest of VWAP and a breakdown of it into LOD.
If you let your ego take control of the trade and thought AAPL would trade 170 and you did not need to set a stop loss, then you would have given back all your profits and gone red.
This is why it is so important to maintain a proper strategy for taking profits, and raising stop losses, because we do not have the information of where the market will trade @ 2-4PM EST. In the moment all we have is the past information from the open until whenever you are trading live in the moment, you can only use past information for future decisions, not the other way around.
That is all from me this week, If you enjoyed this post please share and comment below if you have any pending questions, the goal of this post is to show you, you do not know where the market will trade, you have calculated risk and probability, nothing else, and anyone telling you otherwise has not been trading that long.
Keep in mind this applies the same to stocks, futures as well as options. Even on longer timer frames, here is one example for investing that we caught inside the JWJ Private Server.
Here is a chart of ADM (Archer Daniels Midland) they are a commodity and food processing company that deals greatly in wheat, this was a stock I gave on Feb 22. 2022 @ 76.5$ a share.
The play was set on economic events leading to a rise in wheat prices and commodities in general, we see ADM never broke and closed below its pivot low of 73.6 on the daily chart, this was my stop loss in mind IF we were to revisit, which we NEVER did, therefore, my focus now shifts from what am I risking to where am going to take profits. We took profits along the way over 85 and some even into the 90s before we were stopped out through out trail stop @ 86/per share.
This goes to show that trading Is a combination of both, calculated risk, and systematic profit taking, the issue most traders face is they lack one or the other, and sometimes both. They do not know where to stop out if they are “wrong” and they do not know when to take profits when they are “right” some over stay there visit and some jump off the train too early.
In my opinion, trade the trend, if the trend is saying higher, do not sell until the trend has signified that it is reversing, and if you read my trend trading blog last month you would know what I am talking about.
Disclaimer
Your use of any information or services provided by JWJ Capital LLC, through any websites, chat rooms, educational rooms (electronic), or otherwise is entirely at the user’s own risk. JWJ Capital LLC is not an investment advisory, and should not be used to make investment decisions. JWJ Capital and its rightful owners/ affiliates accept no liability whatsoever for any direct or consequential loss arising from any use of information found within JWJ Capital LLC. The reader is responsible for his/ her own investment decisions. No one in the JWJ Capital server is registered as a security broker-dealer or an investment advisor. No information is intended as securities investment tax, accounting, or legal advice; as a solidification to buy or sell, or as an endorsement, recommendation, or sponsorship of any company, security, or fund. Please be aware when trading stocks, options with margins you can suffer a loss greater than your total account balance. By entering JWJ Newsletter on Substack + JWJ Capital LLC server, you hereby agree to the terms described in this disclaimer.