Risk Management Lesson: Giving Back Profits Needlessly

Every day trader has had to deal with the pain of giving back profits after you are up on the day. It is one of the worst feelings in trading, and for some it feels worse than just having a small red day. In order to succeed as a day trader, you need to know how to avoid unnecessarily giving back your profits on the day.  

Today we are going to go over our trade in SIG in how we were up on a day when there were few trading opportunities. A proper mindset would be to take your profits and run, but in our case we decided to stay around and take two losses in SIG which turned a green day into an easily preventable red day. Let’s talk about some strategies you can implement so you can avoid giving back profits unnecessarily:

Avoid Overtrading

Overtrading is the primary cause of traders giving back profits. Overtrading is when you start taking subpar setups because you want to be more green on the day, or less red. Taking more trades makes it feel like you are being proactive and doing something to make you more money. The reality is this behavior will result in you giving back your profits unnecessarily, or making your red day worse.

It is okay to take your go-to setup when you are green on the day, because you know that this setup has a high probability of making you money. But once you start taking random trades on setups you are unfamiliar with, that is when you venture into the realm of over trading. When you start to take these random setups you are essentially just gambling, since you have no edge in these scenarios. When you start to see signs of yourself over trading, it is a great idea to stop trading to protect your profits.    

Leave Your Computer After The Morning

A great way to avoid over trading is to leave the computer. This completely eliminates the temptation to keep trading. Shut down your trading platform, and go have lunch, go for a walk, or do some other work. Do anything to avoid sitting in front of your computer in front of your charts. You are going to start trading just to keep yourself entertained, and end up taking dumb trades. On the day when I was trading SIG, I should’ve just left to go to the beach. I made the mistake of forcing trades on a day where there was really nothing to trade, and ended up giving back all of my gains from the morning.  Check out this article to learn more about why you shouldn’t trade after 11am.

Don’t Risk All Your Profits On One Trade

There are going to be scenarios when you are having a nice green day, and your go-to setup comes along. This is a great position to be in because you are basically risking the house’s money now. But I advise new traders to avoid risking ALL of your profits on the next trade when you are already having a great day. Even if it is a high probability trade, there is always a possibility it will fail. Most traders I know find it very painful to go from being up $400 on the day to ending up flat on the day.

Instead what you should do is just risk a quarter or half of your profits. This allows you to still capitalize on your setup, but without giving back all of your profits. If you are up $400 on the day, and you have a $5000 account,  it would be a great idea to just risk $100 or $200 on the next trade. This way you won’t get FOMO from missing your go-to setup explode without you, and you won’t have to fear about giving back all your profits.

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