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I am sure anyone
who trades stocks has had to answer this question. One should not wait
until faced with the situation to have a plan to handle it. I mention
this because I am in that position. I am currently 99.8% invested.
Therefore, I too have to make that very decision. There are many ways
to approach such a situation. My approach is to treat open
positions no different than new candidates. Every day the open
positions have to re-qualify.
I
believe before one enters a trade they should have, at the very least,
3 prices in mind: entry price, profit (target price) and stop-loss
price. Sometimes I do this mentally, but the correct way is to use my
spreadsheet. That way, I always know where I am in each trade and how
close I am to the target price or to the stop-loss. Just as I used the
3 prices originally to determine which trades to enter, I use the
current information on my positions to calculate the Reward to Risk
(RR) given based on the latest prices. This factor goes into the mix
with the new candidates. I know the potential RR for the open positions
and the new candidates. Then I make a list for each morning of the
trades I plan to close and the ones I plan to enter given the right
favorable conditions occur. Usually my list is in the order of new
candidate listed first. However, on Mondays, the list will be in the
order that I want to close out the trades.
In addition to the
candidates that I find in my nightly process, I have several trading
partners that provide suggested candidates. However, I don’t
just blindly put them on the list. Before these candidates go into the
mix, I do my own research. I have to like them because it’s
my money. This is where my trading rules come into play So when the market opens
Monday and since I have almost no uncommitted capital, I will watch my
open positions and close any that aren't doing well. This will give me
the cash to open new positions. It’s all about the math. No
emotion! The best stay and the worst go first.
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