When to Take Profits on Your Trades

Are You Taking Profits Too Soon?

Trade Management: When to take profits on a trade is as much art as science.  The two most common mistakes with almost all traders is either taking profits too quickly, or letting losing trades gather more losses.  We’ve talked about how to Stop Loss in a recent post. Today, we talk about finding the right time to take profits.  This is a major task for all investors – and the answer depends on a number of things.  Here are some scenarios you may encounter, along with suggestions for you to consider:

You Got Lucky:
You sell an option and in only one day – or a very few days – you find you have a very nice profit.  This means although you expected to make money on the trade, you suddenly find you have a profit much sooner than expected.  My advice is TAKE THE MONEY AND RUN!  Close the trade fast – as your profit could disappear just as quickly as it came to you.  This doesn’t happen often, but when it does you may have to act fast to preserve your profit.  Time is money and when you make money in a very short amount of time, your ROI goes up.  That’s always a good thing.

When You Have a Profit and a Major Report Coming Up Soon Could Take it Away:
I’ll use an example for this scenario.  Let’s say you have a grain trade and you put the trade on a month ago.  You sold the options for $200 each, and now they are priced at only $90, so you have a profit of $110, but a major USDA report is coming up in a few days.  Here are some alternatives you might consider: 1) If you feel absolutely sure the report will not change in any significant way, you can hold the trade OR since you’ve already collected a little more than 50% of the premium as profit, you can close the trade and pocket the money – then after the report, you can re-think putting a similar position on / or you can move on to other trade ideas.  2) If you are not sure how the report will effect your trade: Since you made 50% or more of premium, take the sure money and close the trade.  This is a “rule of thumb” many option sellers use: When you have profited 50% of the premium, consider pocketing the money and move to another trade.  It is a personal preference: One fellow may just wear a belt to hold his pants up, while another is more comfortable with a belt and suspenders.  You make a decision based on your own risk tolerance and your market view.

Let’s be fully aware here: One of the main factors in making these types of decision is your recent trading historyPeople who study trading psychology have found that a trader’s recent experiences will largely dictate and influence his/her next decision(s).  This is true whether the previous trade has anything to do with the market you are trading now or not.  You have a sort of “emotional memory” that influences your decisions.  Being aware of this – might keep you from making an irrational decision.

No  Second-Guessing Yourself Allowed

Almost always, there are conflicting feelings motivating a trader’s decision to close or hold a trade at any given time.  Figuratively speaking, those two competing angels named Fear and Greed are on your opposite shoulders whispering into your ears.  Relax and learn to deal with this because it is quite common and the feeling never quite goes away, even after years of experience.  Here’s one way to cope with this.  Say “thank you” to both Greed and Fear, recognize their contributions and then tell them to cease and desist their advice immediately.  Once you have a quiet mind, consider your trade as if it is brand new, and compare it to other trades you could have right now that might be better or worse positions.  You are the Captain of your account and it’s your job to keep your money where you get the most bang for the buck.  I’m saying it is perfectly ok for you to get out of a trade at anytime you choose.  You need to give yourself this permission.  You should never be “married” or too emotionally invested in any trade.  Treat the trade for what it is; it is a charge whose job it is to make you money – nothing more, nothing less.  Of course you check yourself to see if you are just being impatient, or if you are justified to take an action.  Then ask yourself this question: If I close this trade now, and no matter if it goes up or down, will I be satisfied with my decision?  Will you feel you made every effort, with the information you have at the present time, no matter what happens after you close it?  If the answer is “yes,” then you must make an agreement with yourself.  The agreement is this: I promise not look back at a decision with the genius of hindsight and judge myself.  This internal agreement is a way simply being kind to yourself.  Call it a mind-game if you like, but it is counterproductive to second guess your decisions and think “I shoulda, woulda, coulda,” about a decision you made with the information you had at the time.  You might learn something from what you did, but there’s no need to beat yourself up about it; this will only cloud your judgment with inaccurate emotional history that you created by allowing this negative mindset. If you want to be a trader with a level emotional keel, you will have to learn to be kind to yourself – and the sooner the better.

“Work like you don’t need the money, love like you’ve never been hurt, and dance like nobody’s watching.”
– an old proverb

Conclusions for Trade Management:

Losing profits not gained won’t put you out of business, but holding bad trades until they take a huge bite out of your account balance will most likely turn into a slow and painful death to your trading.   


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The commentary and examples are for teaching purposes only and are not intended to be a trading or trade advisory service. Any investments, trades, and/or speculations made in light of  the ideas, opinions, and/or forecasts, expressed or implied herein on the web site and/or newsletter, are committed at your own risk, financial or otherwise. Trading with leverage could lead to greater loss than your initial deposit. Trade at your own risk.   Investors and traders are responsible for their own investment/trading decisions including entries, exits, position, sizing and  use of stops or lack thereof.  This is not a trade advisory service and is for educational purposes only.

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