One of the most prevalent issues for traders is determining when and how to cut losses while maintaining winning forex deals. Let’s get into the latter today.
Have you ever wondered “Should I take a profit now or wait?” in the midst of an ongoing trade?
Maybe there were times when taking a profit early was the wiser option. However, I’m sure there were times when you hit yourself on the back of the head for closing your deal too soon.
Why do traders tend to cut profits early anyway? Here are three possible reasons:
1. No Specific Profit Goals in Mind.
There’s nothing wrong with deciding on a profit target as your trade develops. It is just lot easier to stay on a trade with a CLEAR profit target than it is to complete a task with a goal in mind.
2. Poor Risk Tolerance
A trader’s aversion to risk may also contribute to excessive profit-taking.
Some traders would rather have that sense of assurance and bank in at a profit of $100 than risk a portion of their unrealized winnings for an additional $50.
3. Not Confident with their Trade Idea or Trading Skills
Holding on to your trade until the price hits your profit target necessitates not only patience but also a high level of confidence.
There will be many uncertainties along the route, making keeping confidence in your trade concept even more difficult. It doesn’t help that as your potential earnings grow, it becomes more appealing to lock in those gains rather than risk losing them by keeping your trade open.
They say that a bird in the hand is worth more than two in the bush.
But it’s the frustration that often comes with missed opportunities that hold trader back, not the potential loss of unrealized profits. We traders have a tendency to be overly critical of ourselves, especially when our paper earnings vanish into thin air. Perhaps we cut our profits short to avoid blaming ourselves if we lose unrealized profits.
This is perhaps why my favorite trading psychologist, Dr. Brett Steenbarger, stated that it takes a lot more confidence to hold on to a winning trade as it progresses in your favor. But how do you acquire this level of confidence?
Yes, it’s that easy. Unfortunately, it is not as simple as it appears. You must have enough faith in your trade concept to stick to the strategy and stay on to your transactions until they reach your profit targets.
Building self-trust, according to Dr. Steenbarger, can be accomplished in two ways:
1. Instill a Confident Mindset
This is the stage at which you psychologically prepare yourself in the event that the price retraces and your paper profits are lost.
In a trade, for example, you estimate potential retracement regions and set your trailing stops accordingly.
You’ll be stopped out by fakeouts and retracements-turned-reversals at times. Don’t berate yourself for missed profits. Instead, remind yourself that you’ve done your homework and that there will be other opportunities to seize next time.
2. Build on Small Changes
Dr. Steenbarger means that you should do a small bit of the correct thing at a time and build on your efforts to make significant changes.
For example, you might attempt locking in portion of your profits and keeping the remainder free to meet your profit target or stop loss. This manner, you can earn while remaining confident in seeing your deal through to the end.
It is not every day that the market favors you. But, if it does, don’t you want to make the most of it?