45. Stop Your Mind From Causing You to Take Profits Too Soon

http://www.informedtrades.com/
A lesson on psychology of trading and how it relates to people's inability to let their profits run when trading the stock, futures, or forex markets.

In yesterday's lesson we looked at how many traders use technical indicators as an additional factor they consider when deciding when to exit a trade. In today's lesson we are going to begin to move into the next phase of our series on money management, with a look at how traders go about taking profits once a position moves in their favo,r and some of the difficulties that are associated with this.

Before getting into the details of what a trailing stop is and how many traders use them, it is first important to understand the psychology behind taking profits. Develop

From the last several lessons you should not have a good understanding of some of the psychological difficulties people have in taking losses, and some of the different money management strategies that can be put into place to help overcome these difficulties that are the downfall of so many traders.

What may come as a surprise to many of you is that just as many traders have problems letting their profits run as they do in cutting their losses. To help illustrate this I am going to give a quote from one of my favorite books on money management strategies Trade Your Way to Financial Freedom by Dr. Van K. Tharp. When explaining this concept in his book he gives the example below:

When given a chance for "1. a sure $9000 gain or 2. a 95% chance of a $10,000 gain plus a 5% chance of no gain at all....which would you choose?"

A study which was done on this showed that 80% of the population chose the sure thing even though the second opportunity represents a $500 larger gain on average.

Similar to the way that human's are raised in a way that does not allow them to accept losses our environment also teaches us to seize opportunities quickly, or "that a bird in the hand is worth two in the bush", a rule that goes against the second half of the most important rule of trading:

"Cut Your Losses and Let Your Profits Run"

With this in mind we can now move into the next phase of our series of money management with a look at some of the different ways that traders go about managing their position once it begins to move in their favor starting with a look at trailing stops.

Once a position has begun to move in a traders favor, many traders will implement a trailing stop which is basically a strategy for moving the stop they have implemented on their position up when they are long or down when they are short to lesson the loss or increase the amount of profit they will take should the market reverse and begin to move in the opposite direction of their position.

As you may realize from watching my previous lessons we have already gone over one precise method which many traders use for setting trailing stops, the Parabolic SAR. In tomorrow's lesson we are going to go over several other methods, so we hope to see you in that lesson.

As always if you have any questions or comments please feel free to leave them in the comments section below so we can all learn to trade together, and good luck with your trading!

Category:

Howto & Style

Tags:

• howto
• trade
• settingstops
• daytrade
• investing
• money
• finance
• business
• forex
• futures
• stockmarket
• informedtrades

[patriotsundergod]

Dave, I opened QQQQ out of the money puts on Friday, and sold them today for a 31% profit EARLY! I could have made over 100% on that position if I would have just stuck with my exit target. WHY!

[InformedTrades]

Always tempting to grab profits when you have them so I am sure you are not alone in this one. Best Regards, Dave

[hfarhaan]

Hey Dave, just one more question, which one is more profitable in the market, long term investing or short term trading???? (though long term is good for tax purposes)

[InformedTrades]

Hi hfarhaan, I don't think there is one answer you can give for that as there are short term traders that make a lot of money and there are long term investors that make a lot of money. In general however the majority of traders loose money whereas since the stock market has always gone up over the long term most investors who diversify and stay in for the long term make money over the long term. Best Regards, Dave

[InformedTrades]

Hey hfarhaan, I think the answer to this question depends on the person, their personality, and how much work they put into it. Warren Buffet is a long term investor and is one of the richest people in the world however there are also people who are on that same list who are short term traders. If you are unsure which to pursue I would suggest learning a bit about both and then making a decision as to which best fits your personality. Best Regards, Dave

[patriotsundergod]

@tomintroy

2 years later. Wow, this is the biggest delay I've ever seen. I'll send you all my money all right. Just send me your account number!

[tomintroy]

The Tharp study you cited was based on amateur arm chair psychology. To help you understand the folly, lets increase the amounts. You'd you take a 9 billion dollar sure thing over a 95% chance at 10 billion? I think I can guess with 100% accuracy the odds of people taking even a 50 million sure thing over a 95% chance at 10 billion would be.

To someone that has little or no savings, would they risk loosing 9 thousand on a good gamble?

[tomintroy]

@patriotsundergod If your still trading options, just empty your account and send me the money. The spreads, commissions and 'insurance' you're paying are guaranteed to cost you everything.

[VanTharpTrading]

Thanks for the kind words about Trade Your Way To Financial Freedom

[FreeFOREXautoROBOT]

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