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 history. People 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 
“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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