It’s easy to open a position on the stock market. But the hardest part for a beginner is knowing the best time to close your position. If you aren’t exactly sure how to solve this problem, read on.
Why close a position?
There are two reasons for wanting to close a position.
The first reason, and the least desirable one, is because the stop loss has been reached. The position is ended automatically in order to reduce the losses as much as possible. Using this technique, we can limit the risk to our capital to 1% of each position maximum. No more unrealised positions that stay open for months at 10%… The red zones no longer exist. The best part is that everything is automated, no intervention is necessary on your part.
If you do not know what we mean when we talk about a “stop loss” or if you do not know how to skilfully secure your investment on the stock market in order to reduce the risk to a minimum, we advise you to work through the “STARTER” training. In it, we explain all of these concepts in detail in order to help you create regular income using the stock market.
The second reason is because you want to collect your gains. The position is going well, your unrealised gains are increasing. However, you are afraid the price will reverse. So you close the position. Was it at the right time? Was it maybe too early?
The first mistake that the beginner stock market trader makes (Alexandre this case) is to close the position much too early. We have to let the market run its course, give it room to maneuver.
The beginner’s mistake
We sometimes hear “I close my position as soon as I have made a 10% gain”. Admittedly, 10% is already a good achievement. However, by doing so, you are not taking advantage of the full potential of the market. Let us look together at the result of this strategy by studying the SANOFI share.
The share has given a nice buy signal by sharply breaking through the resistance level. We open the position.
The share hits 10% in just 1 month and 4 days. The strategy went perfectly, so we close the position in order to collect our gains.
By doing so, we drastically reduce our chances of making steady and explosive profits. Indeed, if we had waited longer on this trade, we would have made twice the gains.
So ultimately, what should you do?
The solution is to identify a technical signal. Use technical indicators (like the Ichimoku for example) or, more simply, trend lines.
Using Ichimoku, you could have almost doubled the gains by waiting for the right time to close the position and letting the market do its work.
The important message to take away from this article is simple. You open a position on a technical signal and not on a feeling. The exact same applies to closing a position. We close a position on a technical signal and not because we have reached a 1%, 5% or 10% gain. The market often has more to give you than you might think.
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