There is nothing more frustrating than losing a trade; especially if you’ve done the work, made the analysis. If you are like the majority of traders you’ll sit there and wonder why did this happen again when the analysis, the data and the market all agreed with you? It can very well be that the reason is simple: you didn’t close the trade when you should have.
Not closing your winning positions when they turn a payout is an important mistake a trader can make. Selling is when you recoup the investment, part of the investment or, in the best-case scenarios, the investment and some payout. In all cases the takeaway is the same, you are taking money out of the market. If you let those trades stay open, hoping that they will make even more money, it is quite likely that you will lose what you’ve got.
Trading vs Gambling
Hoping a trade can make just a little bit more is dangerously close to gambling (both from technical and psychological points of view). You’ve already made the trade, the trade has done what it was supposed to do… if you sit on it in hopes of getting more you are risking the original trade PLUS the payout, however small they may be.
It’s sometimes hard to close the deal when the payout is less than you’ve expected — say, it is 10% when you’ve been expecting 20%. But here is the real question: is it better to risk that 10% or save what you’ve got? If you are having a hard time answering this question then ask yourself: what will make you feel better? Will you feel better banking a payout, or risking everything on a gamble? And what if that gamble doesn’t pay, how would you feel then? Would you feel good knowing that you lost your investment and the payout you’ve already made, because you willfully risked a payout you already had?
The importance of exits
Remember the old saying? A bird in the hand is worth two in the bush. When it comes to trading the meaning is simple: your payout in the hand is worth more than a payout you think you can make. Taking the small payout now means you may be able to make two or three more trades, letting it ride risks your capital and that may wipe you out of the market. Small payout is the best payout because it is more likely to achieve consistent results and may add up to big money quicker than a losing streak.
If you want to stop making this mistake, you should have a plan to exit your trades. This may mean taking profits at a set percentage of the original trade, or it may mean closing the trade when the price action reaches resistance or support targets. In all cases it means you must put a sell rule in your trading plan and manage your risks, follow it or else pay the price.