Giving back profits is one of the most painful experiences as a trader. This happens to traders of ALL experience levels, whether you have been trading for 1 week or 10 years.
This experience for some is more painful than losing money. If this is a consistent issue for you, read this blog carefully.
The first step to fixing any issue is understanding WHY it happens. You cannot fix a problem if you don’t know what’s causing it.
Exits are one of the hardest parts about trading. You will almost NEVER catch the top or bottom of a move. Get that conception out of your head. But you can catch the meat of the move. With this as your mindset when you’re in a trade, you can learn to avoid giving back profits unnecessarily.
Let’s talk about why traders give back profits needlessly, and how to avoid this:
1. Greed
I can retire from this trade if I stay in. It’s going up why would I get out? This trade will make me a millionaire.
I’ve heard it all. Greed is the #1 reason why traders give back profits. Why trading is so hard: You have to sell/short when things look great and buy/cover when everyone else is fearful. Our natural tendency is to do the opposite. That’s why so many fail to take profits at the right time. Greed.
There are important factors to consider that will tell you if you being greedy, or letting a winner ride. There is a fine line. The factors we will discuss next will help you determine which side of the spectrum you are on. Pay close attention.
2. No Understanding of Technical Analysis
What’s the difference between letting a winner run and greed? An understanding of WHERE and WHY a stock could reverse against your position. These price points are determined by supply and demand.
Is your profit target accounting for key resistance levels on the daily? Intraday? Support levels on higher and lower time frames? Set your profit targets at key resistance and support levels. Don’t pick a $ amount. Focus on where the market should go.
3. Not Understanding ATR (Average True Range)
A stock’s daily range (referred to as ATR) is one of it’s most important characteristics to know as a momentum trader. A stock that is trading outside of its ATR affects the probability of its trend continuing and reversing. Cause of the market volatility, let’s look at the chart of the ETF, $TQQQ:
Look at the daily chart. Notice how recently it’s ATR has increased recently is about 6-8 points now. Do you think yesterday at $70 is a good place to buy after it has already moved 10 points.
Before you enter a stock, look where your entry is on the range of the daily candle. Has it traded it’s typical range yet that day? Does it have a catalyst that gives it a reason to potentially trade outside of its normal range? What does the bigger picture look like?
4. No Pre-Defined Targets
Out of the 1000’s students, I worked with, the ones that always struggle with trade management don’t have profit targets or a profit-taking strategy. They either sell way too early as soon as they get a bit of green or they sell way too late and watch a big unrealized gain evaporate.
They don’t know where or when they will take profits. When you don’t have a complete going into the trade, it is easy to take profits at the wrong time. Don’t let emotions
5. No Partial Profit Taking
Most inexperienced traders RARELY consider taking partial profits. Selling ½, ⅓, ect. Of your position. This is the BEST solution to realize gains while keeping yourself in a position to capture a bigger move in whatever instrument you are trading.
Move your stop loss up after you take partial profits. I like to move it to my entry price after I take profits. This lowers your trade risk, and essentially gives you a free trade in the driver’s seat.
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