When to get out of a profitable trade is a tough decision. You don't want give back profits, but what if you sell and the stock moves higher? One tool we use frequently is the bullish/bearish price objective.
Agile Software Point and Figure Chart
Suppose you bought Agile Software (NASD:AGIL) when it flashed a buy signal at $14.50, this also corresponded to a breakout on the bar chart. When the stock reversed into a column of Os, we could now calculate the bullish price objective, or how far a stock should rise. The column that flashed the sell signal contained 6 Xs, the box size is .5 (stocks under $20 use a scale of .5), and the bullish multiplier is 3. Multiplying these three numbers gives us 9 (6 * .5 * 3 = 9). Adding that number to the column low of 13 gives us our bullish price objective of $22 (13 + 9 = 22). Looking at the above point and figure chart shows that AGIL nailed its objective. Since bullish price objectives, or any indicator, isn't a 100% accurate, it would be easy to get swept up in the bullish mania and think, "Sure it hit my objective, but it's going higher from here." If I'm "convinced" there's more upside potential, I'll still take some profits off the board, and let the second half of my position ride.
Agile Software 60-Minute Chart with Retracement Bracket
But when do you sell the second half of the position? That's when I break out the retracement bracket to calculate how far a stock should fall before the rally continues. Using Agile again, I placed the first retracement anchor at $9.12, the low that started the rally. I then placed the second retracement anchor at the rally high of $22.45. If you did this on 4/20/01 when prices started to fade, the 38.2% level revealed that you would have to be willing to risk $5 on a pullback to $17.35, that's too much profit for me to give back. The 50-period moving average was too far away to offer any closer support, but you could have made an argument for prices not falling below the gap that formed at $19.50. If you didn't get out that day, Agile didn't give you much time to think about it, as prices plunged through the gap on the following opening. Prices then ducked below the 38.2% retracement bracket. That would have been the next signal to dump the second half of the position. AGIL has since mounted a slight rally, but there is no way we could have known that, prices could just as easily fallen to $15.87. If you're still long Agile, or a similar stock, the 50-period moving average has finally caught up, and should help to support prices. Before Agile can think about making another assault on $22.50, it's going to have to fight through $20.