Risk-reward selling focuses on balancing the potential for further gains with the need to protect profits. By selling portions of a position at strategic points, traders can manage risk, secure profits, and maintain flexibility for further upside. This lesson introduces the Sell Some, Hold Some approach, showing how to use it to keep the risk-reward equation in your favor while adjusting for market dynamics.

The Sell Some, Hold Some Strategy

The Sell Some, Hold Some approach helps manage risk by dividing your position into portions and selling strategically:

Initial Risk Covering Sale

Sell 25-33% of your position within the first 3-5 days of a breakout at 3-5 times your initial risk (e.g., a 5-10% profit target).

• Purpose:
  • Covers your initial risk if the breakout fails
  • Creates a cushion for further trades
• Best For:
  • Swing trades or later-stage entries
  • Situations where a full trend development is uncertain

Selling in Response to Red Flags

As the trend progresses, reduce another 25-33% of the position when:

• Early signs of distribution appear (e.g., reversal candles, heavy-volume declines)
• Profit-taking opportunities arise during market weakness or sector rotation

Why Do This?

• Ensures you bank profits as the trade matures
• Reduces exposure to increased volatility

Final Sale at Extreme Extensions or Weakness

Sell the remaining position during:

• Significant extensions from key moving averages (e.g., second or third extension from the 10-day or 10-week EMA)
• A breach of the rising trendline or relevant moving average (10/20 EMA)

Managing Positions with Margin

Leveraging Margin

• Margin can amplify returns but also magnify losses
• General Rule:
  • Sell margin portions into strength to lock in leveraged profits
  • Let non-leveraged equity positions work for longer-term gains

Avoiding Overexposure

• Be cautious when opening new positions if your existing trades are extended but stops are far away
• Example: If three positions are significantly profitable but could lose 20% each before hitting stops, avoid opening new trades until stops on existing positions are adjusted higher

Balancing Open Risk and Future Reward

Overextended Stocks

When a stock becomes highly extended from your stop-loss:

• Assess the potential downside versus the upside:
  • Example: If a stock is 20% above its stop-loss but only has 20% more upside potential, the risk-reward ratio is unfavorable

Taking Partial Profits

In these situations, reduce your position to mitigate risk:

• Secure gains while allowing remaining shares to capture potential upside
• Maintain flexibility to react if the trend continues

Practical Applications

Adjusting Stops in a Portfolio

If multiple positions have extended gains but are far from stops:

• Focus on raising stops before adding new positions
• Avoid overleveraging late in the cycle to protect open profits

Challenges and Solutions

1. Giving Back Profits:
   • Challenge: Waiting too long to sell during extensions can result in significant givebacks
   • Solution: Take partial profits at logical points, such as extensions or red flags
2. Selling Too Early:
   • Challenge: Prematurely selling large portions limits potential upside
   • Solution: Use the Sell Some, Hold Some approach to stay in the game while reducing risk
3. Managing Margin:
   • Challenge: Adding positions during late-stage moves increases overall risk
   • Solution: Prioritize reducing margin positions into strength and avoid aggressive late-stage trades