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Top Slicing And Letting Your Winners Run


Watching a trade move swiftly into profit then reverse back can be a painful experience.

Psychologically, these are the moments that can cause you to go on ‘tilt’ and abandon your trading plan altogether.

When I first started trading I remember jumping on board fast trends in the FTSE only to see them wiped out in a matter of seconds. If only I had a way to lock in profits my career as a futures trader might have lasted a little longer.

Today, I trade stocks and I always have my exit plan laid out in advance. I also use a technique called top slicing so that I don’t experience the pain of seeing a big winner turn into a loser.

What Is Top Slicing?

Although it’s a very simple concept I first heard about top slicing from Investors Chronicle analyst Simon Thompson.

All you do is sell a significant part of your investment at a higher level but leave a little bit there to capture any remaining upside.

For example, let’s say you bought 100 shares of Apple at $150 and have a price target in mind of $180.

Top slicing means you would exit 70 or 80 percent of your trade at $180 then leave the remaining 20 or 30 percent of your capital in the market ready to capture any remaining upside.

The beauty of this approach is that you bank some profits but still have the chance to run the trade a little longer. Apple is going to have to drop a long way now for you to lose money.

The other advantage of this technique is that you can free up some cash and margin for another trade.

A Recent Example In CVRS

I recently had the chance to execute a top slicing trade in a stock called Corindus Vascular Robotics (CVRS).

(Apparently CVRS manufactures systems that allows robotic surgery to be conducted at long distances. It’s all news to me but my system provided the signal so I followed it. I even wrote a short blog post on it and posted it to Seeking Alpha).

What is top slicing? Trade example in CVRS
CVRS rallied 25% and was a prime candidate for top slicing.

You can clearly see from the chart above that CVRS is a volatile small cap. I entered a trade on Thursday morning around $1.60 per share.

These stocks have been doing well lately and I was pleased to see a 25% gain after only two days in the trade as the stock hit $2.

Anything Over 20% Is Good For Top Slicing

I’ve conducted extensive historical analysis and backtesting into these types of stocks and I know that a move over 20% is usually a good candidate for top slicing.

Remember, these stocks are volatile. They often whipsaw back and many will eventually end up worthless. In fact, I found that around 40% of micro caps end up losing half of their value.

A 25% move over two days is a sharp profit so I sold two thirds of my position on the next open and I left the remainder to run on.

I’m still in the trade with the remainder and I will keep it on until I get my standard exit signal.

Other Ways To Exit A Trade

I find that top slicing works best on volatile markets like small cap stocks or thin futures markets.

When the market isn’t so volatile other approaches can work better. I’ve talked about these exit types before and I’ve also backtested them to see how effective they are:

Trailing Stops

Trailing stops work by locking in your profit as you go along which means you capture a nice chunk of profit but you do experience a pullback right at the end of the trade.

I’ve found that trailing stops work well for trend following strategies on less volatile markets. They don’t work well for mean reversion strategies.

Break-Even Stops

A lot of traders use break even stops because they provide psychological benefits. All you do is bring your stop up once your trade is in profit and then you can let it run… a free trade.

This sounds good in theory but the problem with break-even stops is that you can end up scratching lots of good trades but still taking losses on bad trades.

Most of my research has shown that break even stops are not a good choice and you are better off with a trailing stop, profit target or top slicing.

Profit Targets

The usual wisdom says profit targets should be avoided because they cap your winnings which goes against the idea of letting your winners run.

However, I’ve found that profit targets do work well especially in the stock market.

I’ve found that simple percentage targets and volatility targets (such as ATR) work best and they work equally for trend following and mean reversion strategies.

Twenty percent profit target works well for small caps, whereas one percent or three percent works well for ETFs.

The Best Of Both Worlds

But as I alluded to above, the top slicing technique offers possibly the best of both worlds because you get to capture a good chunk of profit while simultaneously letting some of your profits run on.

I’m a big fan of anything that can improve win rate and consistency and I’ve found that top slicing does that.

Comments (6)

Phillip van Coller

Such a great experiment and the results really makes you think about the way you exit any sort of trades.

Even in day trading, I’ve seen an approach where you only exit EOD just before the markets close.
Some trades will end great and some not but statistically it might be a good approach.
Need to test that. 🙂

Random question, any chance you are running another promtion soon on your full year access?

Those kinds of exits can work well in my experience, often better than a stop loss or profit target.

Yes I will be running a promotion at the end of this month. It will be for email subscribers only. Cheers.

Looking forward to it!

I love your work Joe I just need top take my time and learn from the ground up

Love your work!! Do you have test for trading futures?

I have done a little work with futures but prefer to concentrate on stocks. What are you interested in specifically?

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