How To Make This Trading ‘Rule’ Work For You…
A few days ago, I told you about a novel way of protecting your portfolio during times like these. Specifically, I talked about a trading rule that my readers and I are putting into place over at my Maximum Profit premium service.
It’s called the “rule of thirds.”
The concept itself is simple enough to understand. And hopefully some of you who found it compelling have already put it into practice. (For those who missed the discussion, read this first.)
To recap briefly, here’s how it works…
For every trade we enter, we set profit target prices. Once we hit that target, we take 1/3 of our trade off the table. We will have our first third, our second third, and then what I call our “Runner.”
Our first third is set at 25% above our entry price. Our second third is set at 50% above our entry price. Finally, with our Runner, we will simply ride out until one of our sell signals are triggered.
Again, the final sell signal is dictated by our Maximum Profit system. But if you’re trading on your own, this one is up to you…
There Is A Downside, But I Think It’s Worth It…
I want to talk about this rule a little more today, including what you actually need to do within your brokerage account to make it work. And even if you don’t put this specific rule into practice, we’ll cover some things that will hopefully be useful, too.
But before we get to that, remember that our profit-taking rule won’t apply to all trades. Sometimes, a stock we add never quite hits our first profit target price. It happens. Many of these trades we either cut for a small loss or a small gain.
Another potential downside to the rule of thirds is the impact is on our massive winners. I’m talking about triple-digit winners. While we will still make great money on these trades, by taking some profits off early we wouldn’t necessarily enjoy the full return that we’ve typically seen on some of our big winners over at Maximum Profit.
For instance, take our Cardlytics (Nasdaq: CDLX) trade where we booked a 120% gain. Using the profit target rule it would have cut our return down to about 65%. So, there’s some tweaking that will need to be done, and I can adjust the profit target prices to help close that gap.
On the whole, as I demonstrated the other day, the profit targets can help capture more gains during this volatile market. When that doesn’t quite happen, the tradeoff in protection we’ll get during this volatile market is worth it, in my opinion.
Now, let’s get into the nuts and bolts of how to implement the rule of thirds in your brokerage account.
How To Set Up Profit Targets In Your Brokerage Account
The first thing to remember is that everything I’m about to tell you needs to be done after you buy shares on your original position. The next thing to keep in mind is that our price targets will be based on intraday trading prices.
To set up our first profit target sell, enter a “Limit” order to sell, with the instructions “GTC”, or Good Till Canceled. This is usually found under “Time-in-Force” (the default is usually a “Day” order). Good-till-canceled means that the trade will remain in place until the limit price is hit or you cancel it.
Your GTC order will be for one-third of your shares at the target price. For instance, looking at our Paylocity trade I used in our previous example, you would have bought 101 shares of PCTY. Then immediately after, enter a GTC order to sell one-third (34) of your shares at $123.54. Once shares reach that level it will automatically execute your trade. You can also do this for the next profit target as well.
Note: You must change the quantity of shares to represent one-third of the total shares purchased and change your “Order Type” to “Limit.” This allows you to enter the price at which you would like to sell.
Again, when you go into your account to set your GTC profit target order, you’ll need to pay attention to what you are doing. I’ve highlighted below what you need to change. (This is a hypothetical example, all numbers will vary with each trade).
Another thing to remember is if you close out of a trade before it hits your price target, you must go back and cancel that order.
Once you’ve done this, simply repeat the process for your next profit target.
Got it? I know that this was a lot of info all at once. But the goal of this is to capture more of our profits, and not let them get away during these volatile times.
If you have any questions or comments about this new rule, please don’t hesitate to reach out and let me know your thoughts. You can email me at MaximumProfit@Investingdaily.com.
P.S. Since the early days of the coronavirus pandemic, my colleague Nathan Slaughter has been holed up in his “war room”. And he just came up for air to tell us about what he’s been working on…
He’s identified a special subset of stocks… inside a ‘corner’ of the market where your trades are virtually GUARANTEED to go up as high as 320%… 256%… even 760%. And you don’t need any specialized trading account or clearance, no hoarding gold, no buying yesterday’s losers “on the dip,” … or any complex shorting move…
And lucky for you, this pandemic-fueled emergency is your OPPORTUNE time to strike.