Everything I've Learned About Taking Profits: What It Costs to Sell Early, Into Strength, or Hold On
This study is based on Qullamaggies breakout trades 2019 - 2022.
There is no free exit.
Move the stop to breakeven early and it costs you. Sell into strength and it costs you. Hold on longer and your drawdowns get deeper.
When you pick the sell rules you are going to live by, you are optimising for one of three things: profit per trade, how deep the drawdown goes, or how often you are right. You cannot have the best of all three.
But you can make an informed choice about which one you are buying, and that is what this article is about.
Every number here is based on 829 of Market Wizard Kristjan Kullamägi's actual logged breakout trades, logged from his live streams.
The questions this post answers
I've found that impossible to get solid, data driven answers to some simple questions related to sell rules. And I've been through most Discords and communities. So this is what I've set out to answer:
- Do you gain or lose by selling into strength? And gain and lose what, exactly?
- What is the 3 to 5 day window for? When to use 3 day and when to use 5?
- When should we move our stops to breakeven?
- Should we trail with the 10-day SMA or the 20-day SMA?
- Should any of it change when the market changes?
For the purpose of this study my starting point is the sell rules popularized by Qullamaggie - which are also used by most USIC-champions and Market Wizards. Sell a partial into strength and trail the remainder with a key moving average.
>You should sell 1/3 to 1/2 of the position after 3-5 days, and then move the stop to break even. The rest of the position should be trailed with the 10- or the 20-day moving average. Depends on how fast the stock is. If a beginner stick to the 10-day. You wait for the first CLOSE below the 10- day.
Kristjan Kullamagi, from his website
What each choice actually buys you
Every sell rule is a purchase. We are trading one thing for another, and most discussions about exits are people optimizing for different things.
Selling into strength buys a smoother equity curve, shallower drawdowns and a higher win rate. It pays for that in average profit per trade. Trailing everything buys the tail, the rare monster that pays for the year, and it pays for that with deeper give-backs, longer flat stretches, more trades that round-trip to nothing.
Concretely. Take his rule at its most aggressive, half the position sold at the day 3 close and the rest trailed, and compare it with simply trailing the 10-day on everything. On these 829 trades, the rule that sells half on day 3 cuts the deepest drawdown by 36% and lifts the share of trades that finish green by eleven points, from under a quarter to over a third. The bill: the average trade makes about 25% less.
He talks about this himself:
>If you want to prioritize consistency and cash flow over maximizing profits, yes. You gotta be more aggressive in selling because you're gonna be more consistent throughout these different market cycles.
Qullamaggie on stream, 2021-06-01
I dont think there's a right or wrong. They offer different things. And we should know what we're paying to optimize our gains.
Same rules, three scoreboards. What you rank by decides which rule wins.
Where the gain in a winner actually shows up
Tracking 224 of Qullamaggie's breakout winners day by day we get a good idea of what path a winner takes.
The different paths 224 winning breakout trades took (10 day SMA, and breakeven day 3)
Briefly on average vs median: Line the winners up from smallest to biggest. The median is the one in the middle: the trade you usually get. The average is the sum divided by the count, and a few huge trades drag it up. The median is what most trades feels like. The average is what your account gets paid.
The median winner is up 2.4% at the end of day 1. By day 3 it is up 7.8%. By day 5, 12.4%. It peaks on day 9 at 13.6% and then gives 2.2 points back, sitting at 11.4% on day 20. Day 5 is 91% of everything the middle winner will ever show you. Day 3 is 57%.
The average winner tells the opposite story: up 13.8% by day 3, 20.3% by day 5, 27.9% by day 20, and still rising at the end. The average never stops because the few monsters in the sample are still running long after the median has gone quiet.
Both lines are true at once. That discrepency is what drives the argument about taking profits. Sell inside the window and you capture most of what the typical winner will ever give you. Always sell inside the window and you will also always sell the monster.
What Qullamaggie says vs what he does
Selling a partial after 3 to 5 days of a breakout going up is selling into strength. The rule just states it as a calendar. He says it that way himself:
>You sell some into strength after three to five days, and then you trail the rest
Qullamaggie, on stream 2021-02-25
But does he follow his own rules?
Qullamaggie trims continuously, in pieces scaled to how fast the stock moves.
>Everytime it goes up 10-15%, I sell a piece
Qullamaggie, on stream 2020-10-07, on selling high ADR PPL
Slower names get 3 to 5% steps. And the pieces can be small.
>I've been like selling a thousand shares at a clip, like every 10 cents. Selling very conservatively, just to lock in some. So far, I've sold less than 10%. I still have like 37,000 shares left in it.
Qullamaggie, on stream 2020-01-08, on selling VSTM
On the back end he does not leave at one close either. If it's fast moving name he uses the 10-day SMA, but for slower moving, high market cap names, he can use the 20-day SMA.
The summary is that there's no fixed rule, and what he uses depends. But for us newbies, we're well off just selling some into strength and trailing with the 10-day SMA.
>Look, I tried to take a simple, simple breakout setup, dumb it down with as simple rules as possible for new traders so you can compound your money.
Qullamaggie, on stream 2021-03-12, dumbing it down for us mortals
Two out of three partials change nothing
As breakout traders we run a style where a small number of trades carry the whole year. Anything that truncates a winner is therefore paid for entirely by those few trades.
The 829 in the Qullamaggie dataset demostrates this very well.
Two times out of three, selling the partial changes nothing. On 534 of the 829 trades, sell half on day 3 or sell no partial at all, and its the identical trade: same stop, same exit, same result. The median difference between the two rules across the whole dataset is exactly zero.
Ten trades carry the entire difference and then some.
This is not unique to Qullamaggie. You will find that a lot of other successfull traders share this arteficat.
So a partial is free most of the time and ruinous on the one trade a year that would have made the year. Which moves the real question upstream of the exit, to whether your buying produces monsters at all. If it rarely does, take the partial and enjoy the calmer account. It costs you nothing. If it does, nothing you decide at the exit matters as much as not cutting the monster short.
The part that numbers can't price
Everything above treats profit given back as identical to profit never taken. No trader experiences it that way. Or atleast very few.
Locking in a realized gains is one thing. Watching a large unrealized gain evaporate while our rule says hold is a different thing entirely, and the second one is the price of every extra percent the trail earns.
Qullamaggie has a cure for it
>How do you get over emotionally seeing unrealized profits fade on swings? Don't look at your P&L. Boom, problem solved.
Qullamaggie, provding deep value trader psychology advice, 2021-10-26
But it's easier said than done.
Even for him.
>greediness hurt me a little bit in late summer. I gave back several hundred thousand of profits because I overheld a bunch of stuff.
Qullamaggie, on stream 2019-11-25
>I was up 2 million on the year last year, like in the summer, and then I just gave back a million bucks in a few weeks by, you know, having too loose stops.
Qullamaggie, on stream 2020-06-19
And on the day he sold NVAX and then watched it go up another 90% without him:
>Sometimes the hardest thing to do is hold a big winner. It's just so hard sometimes. It's incredibly hard.
Qullamaggie, on stream 2020-07-30
And it doesn't get any easier the bigger your account.
>I don't have as big balls like I had when I had a smaller account. Guys, pro tip. Balls shrink with age.
Qullamaggie, on stream 2020-11-05
The point is, he's not claiming that he doesn't feel anything. He's claiming that the feeling is not the part you fix. You fix the rule, and then the rule carries your through the feeling.
>And if you're too scared, if you feel like, oh, I don't want to give back too much profits, just sell some into strength. Just just sell some right here.
Qullamaggie, on stream 2020-06-24
That is the honest case for selling into strength, and it is not in any of the tables. A rule that is worse on paper and that you can actually follow beats a rule that is better on paper and that you abandon in the third drawdown.
What it costs is that you will be wrong about which give-back was the real one. Like Qullamaggie was in the covid-bull market, where he was afraid I gave a million back:
>It looked very scary several times. Like here on this day, I'm like, oh, I'm gonna give back all my profits. But nope, it just bounced off the 10 day and went straight up.
Qullamaggie, on stream 2020-06-18
But even Qullamaggie breaks his rules.
He bought WKHS on 2020-06-09 at 3.59. Within two weeks it went vertical. He kept tightening his stop far above the 10-day, and on June 25, as the company's live presentation started and the stock dipped, the tight stop took him out.
The 8.50s is about +137% on his entry. His own rule, wait for the first close below the 10-day, would have held until roughly $15. Within thirty sessions the stock printed 22.90, up 538% from his entry. Four days later, on stream:
>This WKHS keeps twisting a knife in me. Why?
Qullamaggie, on stream 2020-06-30, after missing out on monster gains
This is coming from one of, if not the, best retail trader of our time. And he sold early because of a presentation and a brief dip. We are guranteed to have similar experiences.
Nobody grows into not feeling that. Of the 223 winners in this study, thirteen finished their first three weeks above +100%, and on day one not one of those thirteen looked any different from the rest. You cannot tell from inside a trade which one you are sitting in. That is the whole reason to decide in advance.
The rest of the mechanics
Breakeven
His sequencing is specific. Sell first, then move the stop to breakeven.
I tested the two halves separately. Move the stop to breakeven after the first sale, the way he sequences it, and it either costs a little or makes a little depending on how stops are measured, and it roughly halves the deepest drawdown. That is a good trade.
Move it to breakeven early on a full-size position with nothing sold first, which is what most people actually do, and it is not a good trade. On the plain 10-day trail, day 2 takes the account from x38.6 to x36.9 and day 3 takes it to x34.2. On the 20-day, from x31.0 to x28.1 and x26.0.
It's worth understanding why this happens.
Move the stop on day 3 and 229 of the 820 trades end differently. For 176 of them the rule does exactly what it promises. They were on their way to a full loss, the new stop takes them out early, and the average loser shrinks from -0.97R to -0.65R. Total saved: 161R.
But the other 53 trades were up on day 3. Later they dipped back to the entry price, hit the new stop, and ended flat. A scratch: out at the price you paid, nothing gained. Every one of those 53 would have finished as a winner. They cost 230R.
161R saved, 230R given up. Net: minus 69R. And every unit of it came out of a trade that was already working.
Day 2 is the same mistake at twice the size. It changes 410 trades, more than half the book. It saves 308R on the losers and gives up 391R on the winners. Net: minus 83R.
This is also why the win rate collapses as the stop moves earlier. Never move it: 23.7% of trades finish green. Move it on day 3: 17.2%. Day 2: 13.7%. That looks backwards until you see the split above. The breakeven stop does not just turn losers into scratches. It turns winners into scratches too, and there are more winners within reach of your entry price than you can afford to give up.
Wait until day 5 and the damage is gone. Day 5 is the first version that comes out ahead at all, by 10R, and it finishes at x40.4 on the 10-day trail. Slightly better than never moving the stop. Day 4 is still negative.
So the timing does real work. And Qullamaggies ordering is the safe version of it: sell a piece first, bank that gain, then move the stop. By then the breakeven stop is no longer the only thing protecting the trade.
Use the close, not the intraday break
Qullamaggies rule waits for the daily close below the average instead of selling the moment price crosses it. Waiting for the close is sound practice, and the simulation cannot separate it from the alternative.
10-day or 20-day SMA?
The 20-day made more on paper, but most of the extra came from a just a few trades. What it reliably does is hold longer and sit through deeper pullbacks. His guide is the practical one: the 10-day for fast movers, daily range around 5 to 6% and up, the 20-day for slower ones.
A function of your stop width
On the tightest third of stops, the day 3 partial cost nothing at all. On the widest third it gave up about a third of the profit. The tighter your stop, the cheaper it is to sell some early.
New market regime, new rules?
Qullamaggie's advice on what to do during choppy or bad markets:
>In a choppy market, it's better if you're unsure, it's better to take smaller size and pass on more setups rather than uh modify your sell rules, in my opinion.
Qullamaggie, on stream 2020-09-23
The data backs him. In a good market, day 3 half costs about a quarter of the average trade's profit; in chop it costs nothing. But his own chop tweak, half on day 3 in bad markets and a third on day 5 in good ones, earns its entire edge from selling later and less in the good ones. Against simply always selling a third on day 5, the switching is worth exactly nothing. Change your size and your selection when the tape turns. Leave the sell rules alone.
How often does any of it even matter?
There's really just one thing which moves the needle in all of this: selling half on day 3 makes less per trade than trailing everything. Everything else is a coin flip on profit, and a real choice on drawdown versus win rate. Qullamaggie nails it when he says:
>Do I think it's more profitable selling partials after three to five days or just sell at the close below? No idea. I think it's good enough.
Qullamaggie, on stream 2021-03-15, simplifying everything.
3000 words in six bulletpoints
- Decide what is most important for you. Calm and consistency means selling earlier and more. Maximum growth means trailing and living with the give backs.
- If you're an aspiring trader, follow the simple "sell half on day 5, move stop to breakeven, trail with the 10-day SMA". It was built a higher win rate, half the drawdown, and helping you survive while you learn
- Move the stop to breakeven after your first sale.
- When the market regime turns bad, change your sizing and selection, not your sell rules.
- Guard the monster. If a trade turns into one of the few that run, nothing about your exits matters more than not cutting it short.
- Follow the rules until you're comfortable not to. The exit is not what will make or break you.