Scaling out of a position as its price hits designated levels of appreciation by LOTM

Below we will present one version of “harvesting” profits as a stock rallies. We consider this a conservative plan. A more aggressive plan might be the process popularized by Richard Dennis in his “Turtle Traders” program. In his process, once Dennis caught a trend upwards, he used price corrections back to a support level, to buy more shares thus increasing cost and the size of the share position.

Harvesting Profits with pre-set goals in Stage Analysis

The LOTM approach below is similar to a farmer selectively harvesting a “crop” as the “crop” reaches different degrees of maturity. In our approach we plant the seeds during the over-sold or base building stage (Stage one chart analysis), watching the seed maturing and bearing fruit (stage two chart analysis) and harvesting that fruit in a planned and systematic way (late stage two stage three and early stage four chart analysis).

Below we show three different number based processes of “harvesting” our original money out of a stock position. This is the fun part of what LOTM calls, “Position Management.” Harvesting Profits is one aspect of Position Management. There are multiple levels in the process of making money from the market other than the Buy, Sell or Hold decision.

Explaining the grid above.

There are three different example models above. #1) 30/30%, # 2) 50/20% and #3) 50/33%

The first number refers to the percent appreciation we have above the original cost. In the first situation, 30/30% – each 30% level the price rises above cost, we sell 30% (second number) of the remaining shares held. The goal is to recover our original investment and Let the Profits Run. In selling 30% of the remaining shares, we never completely exit the position – until a decision to finally exit completely is made. This fulfills a market adage, “Let Your Profits Run!” We have all sold stocks only to see massive gains over a longer period of time. Winners tend to keep winning so let them work for you as much as possible.

Consider the numeric model that best fits your situation or create your own. My personal preference is the middle model 50/20%, because I tend towards an aggressive investment model. I want as many shares working for me as possible long-term. This does increase the volatility factor on your account so a characteristic to be aware of.

Depending on your goals, usually based on a tax decision, you might use a trailing stop loss to completely exit a position or chose to ride through a stage 4 decline and begin adding back shares in the following stage one base building period.

Size of a position factors into the decision and its tax implications. Example if you own one million shares of a stock with a cost under $1.00 and the stock goes to $12.00, a sale on a stop-loss trade; 1) might be difficult to execute a (liquidity constraint) and create a sizeable tax event when you really like management and what they are doing with the company. A problem I hope we all get to ponder.

    • Thoughts, Questions Comments? Send an email to “Money at LivingOffTheMarket.com”

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Written August 16, 2022, by Tom Linzmeier, editor, www.Livingoffthemarket.com

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