Page 414 - THE MARKET WHISPERER

410 PART 11 - Risk Management

that’s not what happened. Of course, with a little luck it will return to
its uptrend, but usually you’ll do better admitting the error, abandoning
that stock and focusing on another stronger one. Should you ignore the
support and resistance lines? No. If you identify a clear support line in
a 2 to 4 percent range below the entry point, use it.

2. First Profit Target
You need to sell three-quarters of your quantity at a first profit target
of 3%. Why three-quarters? Because of the demons! When you profit
or lose, you need to cope with your deepest inner voices. Get to know
the one perched on your right shoulder yelling into your right ear,
“Remember the time you reached a profit of 3%, waited a bit too long
and then the stock fell and you lost it all…” And then there’s the demon
that sits on your left shoulder, simultaneously yelling, “Remember the
time when you profited 3%, locked in a gain, but if you’d only waited a
bit longer, you’d have made a bigger profit…”

There’s only one way to stave off these demons: sell three-quarters of
the stock. This way, you appease both demons. “You on the right, saying
the stock’s about to fall: here’s your three-quarters. Now leave me
alone! And you on the left, telling me it will go up? Here’s one-quarter
and now go prove yourself!”
Only realizing a profit releases the stress. Once you’ve realized a yield,
you’ll be much calmer and will be able to manage the remaining 25%
with almost no emotional involvement.

Why 3% rather than 5%, for example? Stock prices rise, but always
pull back. The question is only one of when and how much. From my
experience, the pullback generally occurs after a high of 3 to 4%. Why?
Prices pull back once the public begins buying: the public never buys at
the start of the uptrend. They only buy once the stock has “proven itself.”
Usually the public is persuaded that the stock has proven itself only
after a 3-4% rise. At that point, why is the price not going up further?
Because it is convenient for institutional traders to take advantage of the
large quantity of buyers in order to unload large quantities of shares.
Since the institutional traders comprise 80% of the money involved in
all the stocks we trade in, when they sell, we can reasonably presume
that the price will drop. In short: over the years, my records repeatedly
show that 3% is the figure.