- Markets & Manners
- Posts
- When Should You Take Profit on a Stock? A Comprehensive Guide for New Investors
When Should You Take Profit on a Stock? A Comprehensive Guide for New Investors
Master the art of profit-taking with proven strategies that balance discipline and opportunity
Kamil Markets&Manners
August 26, 2025
The moment you buy a stock, a critical question begins lurking in the back of your mind: when should I sell? More specifically, when should you take profit on a stock? This deceptively simple question has torpedoed more investment strategies than perhaps any other aspect of trading.
I've spent years trading E-mini futures and investing in stocks, and I can tell you with certainty-knowing when to take profits is what separates consistent performers from the perpetually frustrated.
Let's dive deep into this critical skill that many beginners overlook until it's too late.
Contents for today:
The Psychology Behind Taking Profits
Before we tackle specific strategies, we need to understand what we're up against: our own psychology.
When a position moves in your favour, two powerful emotional forces activate:
Fear of losing gains - That profit looks good, and you don't want to watch it disappear.
Greed for more - If it went up 10%, why not 20%? Or 50%?
These dueling forces create a psychological tug-of-war that makes rational decision-making nearly impossible without a pre-defined plan.
I learned this lesson the hard way during my early days trading E-mini futures. A winning position would trigger an almost euphoric state-watching those numbers climb higher felt like validation. But that exact feeling would cloud judgment, leading to holding positions too long and watching profits evaporate.
The solution isn't willpower-it's having concrete exit strategies defined before you enter any position.
Fundamental Differences: Short-Term Trading vs. Long-Term Investing
Before discussing specific profit-taking approaches, we need to distinguish between two fundamentally different approaches:
Short-Term Trading Perspective
When day trading or swing trading (holding positions for hours, days, or weeks), taking profits becomes a mechanical, rule-based decision. The market offers limited windows of opportunity, and capturing defined moves is the primary objective.
In my experience with E-mini futures trading, I've found short-term profit-taking requires:
Precision timing
Pre-defined price targets
Mechanical execution
Emotional detachment
Long-Term Investing Perspective
Value investing, as championed by Warren Buffett and Charlie Munger, operates under entirely different principles. Here, profit-taking isn't tied to price movements or time frames but to fundamental changes in the business or its valuation.
For long-term investments, I focus on:
Business fundamentals
Competitive advantages
Management quality
Valuation relative to intrinsic value
These different approaches demand distinct profit-taking strategies. Let's explore both, starting with short-term approaches.
Short-Term Profit-Taking Strategies
When trading stocks over shorter timeframes, several proven profit-taking methods stand out:
1. Fixed Percentage Method
This straightforward approach involves selling when a stock reaches a predetermined percentage gain.
How it works: Decide on a target percentage gain before entering the position (typically 5-20% for short-term trades). When the stock hits that level, sell regardless of market conditions or your emotional state.
Pros:
Simple to implement
Removes emotion from the decision
Ensures consistent profit-taking
Cons:
Ignores market context
May leave significant gains on the table during strong trends
Doesn't account for stock-specific volatility
Real-world application: If you purchase a technology stock at $100 with a 15% profit target, you would sell at $115, regardless of whether the stock appears poised to continue higher.
2. Technical Level Exit Strategy
This approach uses technical analysis to identify potential resistance levels where a stock might struggle to advance further.
How it works: Identify key technical levels (previous highs, Fibonacci retracement levels, round numbers, etc.) and plan to exit as the stock approaches these levels.
Pros:
Aligns with actual market structure
Adapts to each stock's specific price behavior
Can be combined with other confirmation signals
Cons:
Requires technical analysis skills
More subjective than fixed percentages
Temptation to move targets as the stock approaches them
Important note: While I use technical levels extensively in my E-mini futures trading, I've found they can be less reliable for individual stocks, which move based on company-specific news and events that technical analysis cannot anticipate.
3. The R-Multiple Approach
This risk-based method focuses on the relationship between your potential profit and your initial risk.
How it works: Define your risk (R) as the amount you're willing to lose per share (typically your stop-loss distance). Your profit target is then set as a multiple of this risk.
Pros:
Scales profit targets appropriately to volatility
Maintains consistent risk-reward relationships
Creates mathematical expectancy across trades
Cons:
Requires precise stop-loss placement
Can be complex for beginners
Demands discipline to follow
Real example: If you buy a stock at $50 with a stop-loss at $48 (risking $2 per share), a 3R profit target would be set at $56 ($50 + 3 × $2).
From my personal experience trading E-mini futures, this R-multiple approach has proven most effective for consistent profitability in short-term trading. Specifically, aiming for higher R-multiples (3R and above) rather than high win rates has produced better results over time.
4. Trailing Stop Method
This dynamic approach allows you to capture more of a trend while protecting profits.
How it works: Instead of a fixed price target, you use a stop-loss that moves up as the stock price increases, typically based on a percentage or technical indicator.
Pros:
Allows profits to run in strong trends
Automatically protects accumulated gains
Provides objective exit signals
Cons:
Often results in giving back some profits before exiting
Requires consistent monitoring or automation
Can exit too early during normal price fluctuations
Practical application: A 10% trailing stop on a stock purchased at $100 would trigger a sell if the price falls 10% from its highest point since purchase. If the stock reaches $150, your stop would be at $135.
Long-Term Investment Profit-Taking Approaches
When investing for the long term, the profit-taking philosophy changes dramatically. Here, we're not concerned with short-term price movements but with fundamental business changes.
1. Fundamental Change Strategy
This approach, aligned with Warren Buffett's principles, suggests selling only when the original investment thesis is no longer valid.
How it works: Sell when fundamental factors that initially made the investment attractive have deteriorated or disappeared.
Indicators to monitor:
Declining competitive advantages
Management changes or failures
Industry disruption
Accounting irregularities
Benefits:
Keeps you invested in quality companies during market fluctuations
Prevents premature selling of compounding machines
Focuses on business performance rather than stock price
I've applied this approach to my long-term stock holdings, and it has prevented me from panic-selling during market corrections that had nothing to do with the underlying business quality.
2. Valuation-Based Exits
This method focuses on the relationship between price and value, selling when a stock becomes significantly overvalued.
How it works: Establish valuation metrics (P/E ratio, P/S ratio, dividend yield, etc.) that would indicate overvaluation for that specific company or industry. Sell when these thresholds are reached.
Considerations:
Industry-appropriate valuation metrics
Historical valuation ranges for the specific company
Current market environment and interest rates
Practical example: If a utility company historically trades at 15-20 times earnings, you might consider selling or trimming when it reaches 25-30 times earnings without fundamental improvements justifying the premium.
3. Portfolio Rebalancing
This systematic approach involves selling portions of investments that have grown to occupy too large a percentage of your portfolio.
How it works: Establish maximum allocation percentages for individual positions. When a position exceeds that percentage due to price appreciation, trim it back to the target allocation.
Advantages:
Maintains desired portfolio diversification
Forces selling of winners at high prices
Provides cash for new opportunities
Disadvantages:
May cut the biggest winner of your lifetime
Implementation: If your maximum position size is 5% of your portfolio and a successful investment grows to 8%, you would sell enough shares to bring it back to 5%.
4. Life Circumstance Considerations
Sometimes, the decision to take profits has nothing to do with the stock itself but with your personal financial needs.
Valid reasons include:
Major life expenses (education, home purchase)
Retirement income needs
Tax planning
Risk tolerance changes
This approach acknowledges that investing serves your life goals, not the other way around.
Creating Your Personalised Profit-Taking Framework
Now that we've covered the major strategies, how do you develop your own approach? Here's a step-by-step process:
1. Define Your Investment Timeframe
Are you trading short-term or investing long-term? This fundamental question determines which set of strategies applies to your situation.
For stocks you plan to hold for years, fundamental and valuation-based approaches make sense. For positions you expect to hold for days or weeks, technical and percentage-based methods are more appropriate.
2. Assess Your Psychological Tendencies
Understanding your psychological biases is crucial:
If you tend to take profits too early (most common), consider trailing stops or partial selling approaches.
If you hold too long and give back gains, fixed percentage or technical level exits may serve you better.
3. Match Methods to Market Conditions
Different market environments favour different profit-taking approaches:
In strong bull markets, trailing stops can maximise gains.
In choppy, range-bound markets, technical level exits often work best.
In bear markets, tighter profit targets make sense as rebounds tend to be short-lived.
4. Implement Position Sizing to Support Your Exit Strategy
Your position sizing and exit strategy must work together:
Larger positions may require earlier profit-taking to manage risk.
Smaller positions allow for wider stops and more distant profit targets.
More on Position Sizing: How Much to Risk Per Trade: Position Sizing, Expectancy & the Kelly Criterion
5. Create a Decision Framework, Not Just Rules
Rather than rigid rules, develop a decision framework that incorporates:
Primary exit criteria (your main profit-taking strategy)
Override conditions (when to ignore the primary strategy)
Partial exit guidelines (when to sell portions rather than all-or-nothing)
Common Profit-Taking Mistakes to Avoid
Through my years of trading and investing, I've observed several common mistakes:
1. Taking Profits While Letting Losses Run
This error-selling winners too soon while holding losers in hope of recovery-is so common it has its own name: the disposition effect. It devastates returns over time.
Solution: Track your average winning trade size versus average losing trade size. If winners are consistently smaller than losers, you're likely falling victim to this bias.
2. Using the Same Profit-Taking Approach for All Stocks
Different sectors and stocks have different volatility profiles and behave differently. A 10% gain might be significant for a utility stock but insignificant for a biotech company.
Solution: Adjust profit targets based on the specific stock's historical volatility and sector characteristics.
3. Ignoring Tax Implications
Short-term capital gains are typically taxed at higher rates than long-term gains. Sometimes holding a position slightly longer can significantly improve after-tax returns.
Solution: Consider the tax implications of profit-taking, especially near the one-year holding mark for long-term capital gains treatment.
4. Failing to Adapt to Changing Market Conditions
Profit-taking strategies that work in bull markets often fail in bears or sideways markets.
Solution: Regularly review and adjust your profit-taking approach based on broader market conditions and volatility.
Putting It All Together: My Personal Approach
After years of trading and investing, here's how I personally approach profit-taking:
For my short-term trades (primarily E-mini futures):
I use the R-multiple approach, typically targeting greater than 3R
I avoid taking profits at obvious technical levels, as this often cuts winners short
I accept lower win rates in exchange for larger average winners
I look for asymmetric opportunities rather than consistent small gains
Find here more mathematical explanation of reasoning behind capturing traders expected to return 3R or more:
Expected Value in Trading: Measuring Your Strategy’s Real Potential
For my long-term stock investments:
I follow Buffett's philosophy of holding indefinitely unless the fundamental thesis changes
I sell only when the original reasons for buying have deteriorated
I use portfolio rebalancing to trim oversized positions of lower conviction
I focus on business performance rather than price movements
Conclusion: Profit-Taking is Personal
When should you take profit on a stock? The answer isn't universal-it depends on your timeframe, goals, and psychological makeup.
What's most important is having a deliberate, pre-planned approach rather than making emotional decisions in the moment. The best profit-taking strategy is one you can actually follow consistently.
Remember: The goal isn't to perfectly time the top of every move. It's to capture reasonable profits consistently while protecting your capital to trade another day.
What's your approach to taking profits? Have you found certain methods work better for your trading or investing style? I'm curious to hear about your experiences with this critical aspect of market success.
Perhaps one of the reasons to trim positions could be flagging leading indicators?
Kamil - Markets&Manners
Reply