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When To Hold 'Em And When To Fold 'Em

12/17/10 09:10:08 AM
by Billy Williams

Knowing when to hold a stock is important, but it is absolutely critical to know when to sell them.

Security:   BIDU
Position:   Sell

Scores of traders outline blazing trends where you enter with confidence and stand back, watching with breathless wonderment as the stock market takes off like a missile climbing to ever-greater heights into the blue sky with such raw power and speed it leaves you dumbfounded, half-calculating the stratospheric returns you are making. Artfully, a skilled trader will recount in great detail every thought, every ripple of energy that is taken into account as his trade plays itself out, stifling all thought of gain but focusing with laser-like intensity on the process before him, on the step-by-step method to manage a runaway trade in an exploding stock -- the Big One.

It is one of those big, momentous trades that rarely present themselves but when they do are responsible for 80% of the total return that the trader will make that year, giving him bragging rights for the rest of his life. The kind of trade that when his current trading is kicking the crap out of his ego, his confidence, and not to mention his capital, he can recount that trade.

Like a professional card player, he doesn't play the hand dealt as much as the market itself, the traders who make up the sea of buying and selling.

And while many of these traders tell these tales of their greatest victories, the one great secret that the master traders know is that while they know how to trade the setups in the market that present themselves, they are keenly aware of when to step aside and avoid trading altogether. This cool detachment of a consummate professional is the signature characteristic of a player.

This is important because such a time in the stock market should be recognized for what it is, a time to step aside and reassess what the market is telling us. The market may continue higher, but the stocks that lead may pass the baton to the new leaders who race upward, taking the overall market with them.

Already, big leaders such as (BIDU) (Figure 1) are falling below their 50-day moving average, a major warning sign. BIDU has had an impressive run since February 2010, gaining multiples of returns on any investment during that time but now is acting considerably weaker.

When you've made as much money with a particular company's stock, it is easy to get sentimental, but another hallmark characteristic of those who have devoted themselves to the craft is to be completely ruthless in the application of your capital and steely disciplined in the implementation of your trading method.

Stocks that are lackluster should be cut. No exceptions.

FIGURE 1: BIDU. BIDU has been one the strongest stock leaders since early February 2010, but it has fallen through its 50-day moving average, revealing it is losing its position.
Graphic provided by:
Being the greatest, most skilled heart surgeon in the world does no one any good if you are frightened by blood. No matter how great your ability, you are worthless if you can't apply what you know due to fear or phobia.

Cash out of your position and deploy your capital where the odds are in your favor and the prospect of higher returns is likely.

Such a time may soon be called upon you as market leadership changes hands among the stock leaders from this point forward.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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Date: 12/21/10Rank: 4Comment: 
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