When to Take Profits in Micro-Cap Advocat Inc. (AVCA)

Apr.27.06 | About: Diversicare Healthcare (DVCR)

The Microcap Speculator submits: I have received a number of emails about whether to take profits in Advocat, Inc. (AVCA).

The stock is up almost 200% since reader Phil G. brought it to my attention 6-7 months ago. That's great.

But determining when and how to take profits deserves more thought than just noticing a big gain. Microcap stocks tend to move a little differently than their larger cap brethren. They often spike hard and retrace fully, but there is a subset (OTCQB:PTSC) that simply go stratospheric. Your profit taking strategy should address both of these tendencies.

Here is how I do it -- but remember this is only one man's strategy, not advice.

  • When I put on a position, I immediately put in a sell order to sell about 1/3 at a 25-30% gain. I also write down an area I would like to get out of the stop, a mental stop.
  • If the first target is hit, I place an order to sell another 1/3 at around a 100% gain and move my mental stop to around breakeven.
  • If those two targets are hit I use a volatility-based trailing stop called a "chandelier" on the remainder. This is intended to allow/force me to keep a position into a very strong or prolonged rally.
  • While I break these rules more often than I care to admit, I have stuck with them for AVCA and will continue to do so. The rally has taken out my first two targets, and I have complied reluctantly with my methodology. I now feel comfortable holding the remainder as far as the rally takes me, and if it begins to weaken, the chandelier (the pink dots to the right) will lock in the bulk of the profits.

    DISCLOSURE: I am long AVCA.OB. Not a recommendation to buy or sell any security. For informational and educational purposes only.

    AVCA 1-Yr Price Performance: