Fear of Letting a Profit Turn into a Loss When Trading
By: rob rens | Posted: 11th January 2007
There are the four many fears in trading, and how you can work to handle them. The one I am going to be talking about here is the fear of letting a profit turn into a loss while stock trading.
Fear of Letting a Profit Turn into a Loss
I get many more questions from subscribers asking if it is time to take a profit than I do subscribers asking when they should take their loss. This represents the fact that most traders do the opposite of the "let profits run, cut losses short" motto: they instead like to take quick profits while letting losers get out of control. Why would a trader do this? Too many traders tend to equate their net worth with their self-worth. They want to lock in a quick profit to guarantee that they feel like a winner.
How should you take profits? Should you utilize a fixed target profit objective, or should you only trail your stop on a winning trade until the trend breaks?
Those who can accept more risk should consider trailing a stop on their trending position, while more conservative traders may be more comfortable taking profits at their target objective. There is another alternative as well, which is to merge the two concepts by taking some profits off the table while seeking to ride the trend with a trailing stop on the remaining portion of the position.
When I trade options, I usually recommend taking half of the position off at a double or more, and then following the half position still open with a trailing stop. This allows you to have the opportunity to ride my best trading ideas further, as these are the trades where I am mostly likely to continue being right. Yet, I am also able to get the initial capital at risk back in my pocket, which frees me from worrying about letting a profit turn into a loss; I am guaranteed a breakeven even if the other half position were to go to nothing overnight. My general rule for the remaining half position is to exit if it reaches my trailing stop of half its maximum profit on an end-of-day closing basis, or scale out of the remaining half position every time it doubles again.
I'm also a big fan of moving your stop up to breakeven relatively quickly once the position starts to move in your favor, by about five percent on a stock or by roughly 25 percent on the option. It is also critical to recognize the impact of time spent waiting for a position to move. If you are not losing but not yet winning after several trading days, there are likely better opportunities elsewhere. This is known as a "time stop," and it will get your capital out of non-performers and free it up for fresher trading ideas.
The Author of this article is Mouser57 of StockHideout.com Stock Message Board
Mouser57 of StockHideout.com Hot Penny Stocks Stock Message Board
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Tags: subscribers, profits, risk, fear, fears, losses, losers, net worth, self worth, stock trading, motto, initial capital, trades, maximum profit, quick profit