Chart of the week: A lesson in when to take profits

BP has run into a brick wall – along with the crude price

Continuing my coverage on this oil major from May 8, I noted then several warning signs for the bulls and suggested taking at least partial profits at my target area at the £5.68 zone or above. Since then, we have had some excitement in the crude oil market.

So today, this is a lesson in when to take profits – an art that many traders and investors could well develop!

Recall, I started buying BP in February at the £4.70 area when the mood was very bearish. Today, the mood has switched to very bullish. I noted that as the oil price was rising strongly (until last week), I was seeing higher and higher targets for it set by many pundits.

• Chart of the week: Time to take profits at BP?

• Chart of the week: Is BP a buy here?

To me, that was a warning sign the rally was running out of steam and a severe correction was due. There were just too many bulls on one side of the boat.

And that correction wasn't long in arriving – here is the chart:

Source: interactive investor             Past performance is not a guide to future performance

The move up from my entry was a very rare straight line affair of almost 30%. And, as crude oil was pushing up to the $72 (WTI) high, BP had advanced to the £6 area, just above my initial target at £5.68.

Because bull runs always top out when conditions appear extremely favourable, I had confidence the shares would correct very soon.

This attitude is in stark contrast to that of most, who get more excited by the upside potential as prices rise after a long bull run. The time to get excited is when the market is turning up from a steep decline, not after a 30% eight-week rally!

In fact, the shares have now declined sharply to the current £5.45 area. If the crude price has topped, as I suspect, there appears to be little more upside potential in BP – at least in the near future.

If I am wrong and BP and the oil price resume uptrends, I have the option of getting back on board. But for now, I have a tidy profit in the bank.

The bottom line: Setting a sensible target early on has enabled me to take a tasty 22% gain (magnified ten-fold at least when spread betting). Keep doing that and imagine what your account balance will be a few years down the track.

John Burford is the author of the definitive text on his trading method, Tramline Trading.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation, and is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

ii adheres to a strict code of conduct. Members of ii staff may hold shares in companies included in these portfolios, which could create a conflict of interests. Any member of staff intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. We will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, staff involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.