CBI Update and Profit Taking Food for Thought

It's 3pm as I write this. The Capitulative Breadth Indicator CBI will almost certainly drop from 13 to 8 today at the close. In November, which was the last time the CBI had reached 10, I had someone ask me to look at the implications of taking profits a bit quicker. Rather than waiting for the CBI to return to 3, the alternate exit we explored entailed selling on the first profitable close when it dropped to 8 or lower. If the trade remained unprofitable then continue to hold until the CBI returned to 3 before selling. Changing the exit criteria in that way meant early exits on 11 of the 16 trades. In the other 5 trades the CBI dropped from 9 or higher to 3 or lower in one day never allowing the “profitable 8 rule” to take effect.

The net effect of this early exit technique was that profits were reduced on the 11 early exits by about 0.6% per trade. Traders that are nervously sitting on winning positions may want to factor this information into their thinking when deciding whether to take partial or full profits at this point.

The Large Bars Down and Up Study from last night indicated that a pullback was likely within a few days. Whether the pullback comes before or after the CBI hits 3, I don’t know. If you’re sitting on healthy profits and not willing to wait through a pullback of potentially 2%+, then you may want to consider taking at least partial profits. It is not the mathematically optimal exit, but I find sometimes taking partial profits can help alleviate trade anxiety – allowing you to think more clearly and manage the rest of the trade more objectively. If the pullback happens to arrive before the CBI hits 3, then there is also the possibility of adding back to your position at a lower price.

Just some food for thought…

Rob