Truly Accept the Risk
Some of you reading this will say that you always place your stop and are willing to lose the money. While you may say this, you really don’t want to lose the money. You’ll place your stop out there, which could be pretty far off from your entry price.
Over the next couple of hours or days depending on your timeframe, you will slowly move the stop up because the stock is not “acting” properly. Sure enough, at some point, your new stop order is triggered right before the market takes off. If this has happened to you, it is one of the most frustrating events that can occur in the market.
Your analysis was right, the market, in the end, gave you what you expected; however, you were not willing to accept the randomness of the market and the fact you could lose money.
Until you accept the risk, you will interpret the noise of the market as a potential threat and will find some way of rationalizing to yourself that you must exit the trade now.
Knowing When to Take Profits
What is your trigger for exiting a trade as a winner? Please don’t give me some nonsense about this or that key level. Unless you are intuitively trading for profits, which are probably less than 1% of the trading population, how exactly do you book profits?
Again this concept sounds simple enough, but when you factor in that most traders have an expectation of what the market will do next it makes this almost an impossible task. For example, back in March of 2003 my business partner and I were long put options on the DIAs. We had about $200k in profits. Up to this point, we had executed our trading plan flawlessly.
At the time we expected the Dow to hit the 6k – 7k level which it ultimately did in ’09 but for this fight, the bears did not have enough energy. Instead of listening to what the market was telling us in terms of the correction was over, we held on for what we expected to happen.
This crucial mistake meant that instead of coming out slightly north of 1M, we loss the 200k. Afterwards, we were talking about this traumatic experience and both of us had the same feeling that it was time to take profits, but because we did not have a clear trigger we just held on for what the market was going to do next.
Do you find yourself holding on for what your analysis says the market should do next? You must figure out when it’s time to walk away with the cash to move on to your next conquest.