We spend a great deal of time considering risk and managing stop losses. Something we focus less on is when we are actually onside in a trade?
Taking profits can be more challenging than when to take a loss! Running losses is bad but cutting profits in a trade or making money during the day and then giving it all back to the market could be considered worse!
If you have a good start to the day it’s important to preserve some of that profit at some stage as I have seen many an experienced trader give it all back and more, which for me is the biggest crime in trading (well, except for getting caught insider-trading!)
We will always have those days where no matter what we do we will not make money and another where we are in the zone and can do no wrong. It is the other eight of the 10 trades where we must work to make the money and then fight to keep it. We need the good days to cover the bad days and three good days should cover at least five bad days – if you keep to a solid risk-reward of at least 2:1 in your favour.
Calculating your ‘happy level’
I suggest to traders that they calculate their ‘happy level’, the amount they need to make to cover their trading costs, personal expenses and then a percentage on top.
So, what happens when you move past your ‘happy level’? I suggest only risking the additional profit above that level, maybe a little more or less depending on the market conditions. If it is a winner then increase the minimum you will take home today and as long as you are having winners you continue to increase your ‘happy level’ risking only a small portion of the profit.
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The first trade you get wrong and lose on is your last trade of the day, STOP! Your luck has broken so keep what you have…and do NOT say to yourself, I will just have one more…fatal!
If you understand trailing stops, then you will appreciate the concept. It is the same as placing a trailing stop on your position, except here we are placing it on the P&L (profit on the day).
Trailing stops remove the decision making
Trailing stops are very useful on a winning position as it will protect some of the profit and get you out should the market turn. This removes the decision making from you. Once you have seen the market more in your favour it is hard to accept less! The market turns a little and you think: “why didn’t I take my profit?” Then you promise yourself, if the market gets back to that level again you will take it next time.
Now the market continues to erase your profits and you regret not taking a smaller profit when you had the chance, and of course, eventually you get stopped out! It happens to all of us and it’s human nature as that greed sets in. We always want to buy the low and sell the high, unfortunately it is not that easy, especially to focus on it consistently!
If you have the functionality to use trailing stops, try it…if not perhaps you should use a different trading system! Definitely apply it to your good days to protect some of that profit.
