Today I'd like you to welcome Geoffrey A. Smith, from Day Traders Institute. DTI has been a leading the way in trading education for years and I'm very excited to have Geoffrey, the lead instructor from DTI, join us today. Please take time and read the article below on "The 3T's of Trading", then visit the DTI to learn more about them as a company and how they can help you with your trading and investing.
As a trader and instructor, one of the most frequently asked questions I get is “where to take profit”? When I first was asked this, my initial response was “when you are making money”. But after pondering the question for some time, I came to realize that many traders struggle with taking profit hoping that the market would go further in their favor only to get stopped out for a loss. So to help traders with learning to take a profit, we came up with the 3T’s of trading:
Look to trade in thirds, taking 1/3 of your position down at a time. When using the 3T’s, the goal is to first finance the trade and let the last third pay as much as possible. Wouldn’t it be nice to trade with someone else’s money? Well, initially we have to put up the cash to get into the trade and take on the risk of losing money. But if we take enough of the trade off and adjust the protective stop to a point that the trade cannot lose, this eliminates our risk in the trade, relieves the fear of losing, and allows us the legal right to let greed set in.
The first T is the Tick part of the trade. Really it is a scalp, only looking for a small amount. If trading stock, take 1/3 of the position off at $0.30. If trading futures like the Emini S&P, look for 0.50 to 0.75 of a point. This accomplishes two things, it reduces your exposure to the market, and also allows you to pay commission.
The second T is the Trade. Look for twice as much as you got on the Tick part of the trade. Again, if trading stock, look for $0.60 or so. This will elevate 2/3 of the initial position and lock in $0.90. If you adjust your protective stop back $0.50 from current market, then you are on a “free ride”. At this point, you have no more risk in the trade and can concentrate on making money.
Finally is the third T, which is the Trend part of the trade. This is the last 1/3 of the position that we hope will pay the most. Sometimes you will get stopped out on the last 1/3, but other times the market will continue to trend in the direction you are trading and can end up making your whole day.
These price targets are not set in stone but examples of what you might look for. On a stock that is trading at 50, you can’t look for as much profit as one that is trading at 150 because of the price movement. You will need to adjust your profit targets accordingly. I will look at the ATR (average true range) of the stock and set my first target at 10 – 15%, second target at 30 – 40%, and look for the whole ATR on the last third. Some days the stock will get there, other days it will not, but at least the trade was financed on the way.
Give this technique a try and see how you like it. It helps in reducing the fear of losing and allows you to take some profits as the market trends in your direction. It has been my experience that the first target is hit 85% to 90% of the time, with the second target getting filled about 75% to 80% of the time. Not every trade goes in your direction, however, if 1/3 of the trade has been taken out of the market, then the loss has been reduced as well. Remember as traders, we want to make are losses small and our gains big. The 3T’s is one technique to help us get there.
Geoffrey A. Smith
Chief Instructor – DTI