An important decision when your investment is yielding handsome profits is whether or not you should close your investment (thus lock in your profits) or hold onto your position and hope for even more profits. Here’s how to decide.
- Stick to your plan. Sticking to a plan certainly has its merits. No need to spend valuable time on rearranging stop loss orders, stop profit orders, etc. The time spent changing plans is time that could have been spent on analyzing the markets. The key to be a successful investor lies in keeping a clear head. Attempting to change plans can cloud your mind, and prevent clear thinking.
- Hold onto your position, and hope for your gains to extend. There are certain merits to extending onto your position. You risk the chance to profit from further advances in price. However, you also risk losing all your profits if the price moves against your investment position. My advice to you is that if you’re going to extend your position (which I often do), also, extend your stop loss order. That way if the price moves against you, you will still be able to capture a portion of the profits.
- Close the position, and take a break. When I’m nervous and unsure as to whether I should extend my position, I usually sell and take a break from investing. Only by closing a position can you think in a clear, unbiased manner.
- From a fundamental standpoint. Have the fundamentals changed? Are the fundamentals still the same as the ones when you first opened this investment position? Fundamentals are only meant to be a guideline. I depend a lot on technicals to tell me if I should close my position and take profits. Teaching you when to sell or buy due to technical indicators is for a future post.
So what’s your view on this topic? Do you ride your gains, or do you sell when your profit target has been met?