Many investors spend a great deal of time on analyzing losing positions. This is very important as the name of the game is risk right? But, there are many great reasons to analyze winning positions as well. Now, previously we focused on the short term trader and how they would exit winners and move on. Today we look at the long term investor and why he, or she may want to close a position and take their profits.
The first thing that is the most obvious is a return target. While the short term trader will look for technical reasons to sell or news events to close, the long term investor can hold through those short term gyrations. Long term investors and many large funds tend to take action at different profit points. A 5% gain for instance may cause them to move some money from that winner and start a new position while letting the rest of the position carry on. There are also points where the long term investor will consider adding to that winning position. For instance, if you see a gain of 10% then you could theoretically add more to your position but not be risking anymore.
Another way that long term investors can decide on profit targets is the 50 day moving average. As simple as it sounds, even the most seasoned investors will look at this on a chart. A stock that consistently out paces its 50 day moving average is one that is technically sound. Any breach of that could spell the end of the trend and many choose to take profits at that point. Take a look at any trending stock once it closes below the 50 day moving average. Do you notice any volume increase or push lower. Closer inspection will reveal the long term investors taking their profits at this point.
There can be many reasons one would want to lock in a profit on an investment and the truth is that there is really no wrong reason. The only bad way to take a profit is randomly.