Expert Exits- 2) The trade is winning
So, lets say we have been trading well and cutting our losers short and adding to our winners and now we find ourselves carrying a very large unrealized profit. We have three choices, take all the profit, take part of the profit, let it all ride. Let's drill down into why we might do any of the three possibilities:
Take all the profit- There are several reasons we might just want to close all of the trade and take all of the profit. Suppose the price has just made a huge and unusual move in your favor, like a daily candle much larger than the usual daily atr. More often than not, price will retrace before continuing it's move with the longer term trend. Taking all the profit ensures that profit is taken out on a peak price. If price retraces, it may be possible to re-enter the trade after the retrace ends. If price doesn't retrace, but continues in the direction of the longer term trend, then re-entry is still a possibility. In either case, profits are locked in and the only risk is to future opportunities and that is less serious of a risk than one to large unrealized gains. Our goal is to buy low and sell high. Selling high is a relative thing of course. If the current peak in price is much higher than anything recent, we can't say for sure that it is the highest point price will ever reach, but we can say that it is "a high point". As long as we are buying low, or lower, and selling high, or higher, we will do well in this business. We just don't always have a clear cut vision of what the relative lows and highs are, but in this case, we are sure we are on a high point, so there is little risk and much reward in taking our profits.
If there has been a major change in a critical fundamental factor that was driving your trade, it might be time to take your profits out and stand on the sideline while the market sorts it out. If the concern proves to be unfounded, you can always re-enter the trade. If it proves to be as serious as you thought, you'll be a happy camper with real profits in the bank. Once again, the risk is only to possible future opportunities, which is less serious than to large unrealized gains.
There are times when you can just sense the real risk mounting in the markets. Like right before a major economic report or a Fed meeting. Wars break out, foreign economies falter, bad stuff happens. If you aren't sure which way these earth shaking events will move the market, taking out your profits might be the wisest move. Our goal is to ride the steady trends over a long period to massive profits, not to catch a lucky break on the next news flash. Risking large unrealized gains on the flip of a coin is probably not a good way to make a steady income from trading. When in doubt, always default to the side of reducing risk.
There are personal issues that can occur that would cause you to cash in all your chips. If you get the flu, if you are going to be away from your computer for a long period like a vacation, if you have some sort of personal problem that keeps you from concentrating on your trading. If you find yourself in a situation where you have large profits but can't continue trading effectively, take your profits and come back later when things are sorted out.
Next- Take part of the profit
So, lets say we have been trading well and cutting our losers short and adding to our winners and now we find ourselves carrying a very large unrealized profit. We have three choices, take all the profit, take part of the profit, let it all ride. Let's drill down into why we might do any of the three possibilities:
Take all the profit- There are several reasons we might just want to close all of the trade and take all of the profit. Suppose the price has just made a huge and unusual move in your favor, like a daily candle much larger than the usual daily atr. More often than not, price will retrace before continuing it's move with the longer term trend. Taking all the profit ensures that profit is taken out on a peak price. If price retraces, it may be possible to re-enter the trade after the retrace ends. If price doesn't retrace, but continues in the direction of the longer term trend, then re-entry is still a possibility. In either case, profits are locked in and the only risk is to future opportunities and that is less serious of a risk than one to large unrealized gains. Our goal is to buy low and sell high. Selling high is a relative thing of course. If the current peak in price is much higher than anything recent, we can't say for sure that it is the highest point price will ever reach, but we can say that it is "a high point". As long as we are buying low, or lower, and selling high, or higher, we will do well in this business. We just don't always have a clear cut vision of what the relative lows and highs are, but in this case, we are sure we are on a high point, so there is little risk and much reward in taking our profits.
If there has been a major change in a critical fundamental factor that was driving your trade, it might be time to take your profits out and stand on the sideline while the market sorts it out. If the concern proves to be unfounded, you can always re-enter the trade. If it proves to be as serious as you thought, you'll be a happy camper with real profits in the bank. Once again, the risk is only to possible future opportunities, which is less serious than to large unrealized gains.
There are times when you can just sense the real risk mounting in the markets. Like right before a major economic report or a Fed meeting. Wars break out, foreign economies falter, bad stuff happens. If you aren't sure which way these earth shaking events will move the market, taking out your profits might be the wisest move. Our goal is to ride the steady trends over a long period to massive profits, not to catch a lucky break on the next news flash. Risking large unrealized gains on the flip of a coin is probably not a good way to make a steady income from trading. When in doubt, always default to the side of reducing risk.
There are personal issues that can occur that would cause you to cash in all your chips. If you get the flu, if you are going to be away from your computer for a long period like a vacation, if you have some sort of personal problem that keeps you from concentrating on your trading. If you find yourself in a situation where you have large profits but can't continue trading effectively, take your profits and come back later when things are sorted out.
Next- Take part of the profit