V.12:4 (171-175): On Profit-Taking by Perry J. Kaufman

On Profit-Taking by Perry J. Kaufman

Taking a profit should be so easy, but it never seems to be. Why is that? Veteran market analyst Perry Kaufman explains the whys and hows and also explains how profit-taking has advantages over straight trend-following.

If you were to ask a trend-follower, “How do you trade successfully?” the answer would be, “Let your profits run and cut your losses short.” That seems to be the philosophy underlying trend-following programs. One of the most stunning examples is gold, which in January 1980 skyrocketed from $100 an ounce to $850 an ounce. During the period that gold prices were soaring, there were good opportunities to take profits at $250 an ounce and $400 an ounce, but neither would have been close to the profits possible if a long position had been held simply using nearly any trend-following method. For example, Figure 1 shows the move in silver during the 1979-80 period, which could have captured exceptionally large trend-following profits. The high volatility that followed, however, may have reduced those returns. In Figure 2, a chart of the Deutschemark, profits look large, but realistic entry and exit points show that only 200 points could have been captured from a maximum of 800. The very high volatility would have demanded a large investment for a small return.

Returning frequent profits is far more desirable than waiting for such an opportunity. Spectacular price moves do not occur often enough to be worth sacrificing a good, everyday plan. In addition, the risk associated with a major move is correspondingly very large and requires a bigger investment to protect an infrequent occurrence.