Preserving and Maximising Profits
- Don't be greedy and don't set yourself unrealistically high performance targets. Greed is always a big factor when investing. Set yourself profit targets and stick to them. It is very easy to see a profitable position turning into a loss. A market turn can quickly wipe out gains. Be prepared to sell your positions immediately. You can always re-enter the market at another time, as long as you still have capital.
- Stops can also be utilised as a tool to help preserve profits. For instance, a strategy that performs well in trending markets is to dispense with the limit and focus only on the stop loss. When a trade has moved into profit territory, you move the stop level higher to protect the profits.
- It makes sense to adjust your stop level to breakeven as soon as a trade has moved significantly in your favor and/or taking partial profits as the share moves up. This has the effect of locking in part of the gain while trying to run the position as far as possible. When shorting it is a case of moving the stop loss level down to track the decline. Regardless of how much more you think you can make, everyone else is out there to make money, not to hold shares for twenty years and see them rise and fall... Do not get emotionally attached to shares, they are shares, not pets.
- Take at least a portion of profits - As the market moves in your favour close a portion of your position to take profits then move the stop losses accordingly to lock in even more gains.
- On the other hand taking profits too early and running losses for too long are two common flawed strategies especially amongst beginner traders. Some traders just can't hang onto a winner. And chasing losses by doubling down or adding on rather than taking your medicine and moving on.... You really need to make sure to ride trends and profits as much as possible. Many traders make the mistake of not closing poorly performing positions quickly enough. Let your stops take you out. Trade like a guerrilla. If you are managing your trades properly, your average winning trade should be much larger than your average losing trade. Once you have the discipline to trade in this way, you should be able to achieve overall profitability even if only half of your trades are winners. It is very tempting and indeed natural when sitting on a big profitable trade to want to take profits at the first sign of any retracement but this is not the right approach in the long term. If a trade that we have great profits on starts to go against us for a few days and we end up giving back some of our initial profits that doesn't mean that the trend has reversed, but only that the market is now going against our position. Fight on the winning side but be willing to switch allegiances if circumstances change.
- An old investment 'cliche' says that we should let our profits run while cutting losses short. This may be a cliche but too many traders break this rule by moving their stop losses when trades go against them and taking profits very early. A stock market adage that bothers me states that it's never wrong to bank a profit but if your strike rate is less than 70% on winning trades I would say it's completely wrong because you need to run those winners to cover the losing trades, some traders I know have strike rates of 40% but make a fortune because they run those winning trades, this is where each individual has to understand that their plan for trading runs in tandem with their money management. It is a bit like the trades are the battles, the money management being the logistics, military planning kiss me hardy! Trends can continue for very long periods of time (much more than you might have expected) and this holds true for both bull and bear markets lasting several years as well as for moves over a couple of weeks.
- How can you ensure that you run your profitable trades sufficiently? Your decision to exit a profitable trade should be based on what your latest research is telling you. If you use charts to base your trades and the asset you are, say, short-selling is not yet oversold and there are no support levels at hand to break its fall, there is a good case for remaining in the position. It also helps to place a limit order as it gives you the discipline to stick to a pre-determined target exit level. Another approach is to position size, which involves opening additional positions or scaling back depending on the price movements.
- Hold your best performing shares the longest; sell poor performers quickly. Avoid penny shares and try to trade only shares which have good liquidity so you can easily enter and exit trades.
- Don't look back. Don't get disheartened if a share continues moving even higher after you sell it. If your price target was reached, then it was a good trade. Be happy with your gains and move on to the next trade. Also, don't get put off by losing trades. Just like door-to-door selling where a salesman doesn't expect each contact to result in a sale, losses are a normal part of trading. Just keep the amounts lost as low as possible.
- Don't chase shares. If you miss a potential trade, move on. The market offers new opportunities every day.
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