When to Take Profit in Trading // Ep. 83

In This Episode

• The biggest roadblocks to making the most money on a trade
• Figure out which exit scenario is more painful to you
• Understand the fallacy of making the most money

Tips for Taking Profits in Trading

Learn the best options for exiting trades. The trick to figuring out which exit is best is to find out what is the most uncomfortable to you.

Your goal shouldn't be to make the most money, it should be to find out what you're most likely to stick with.

Read the Transcript

Hugh: Hi, Walter. This is the classic question but how do you know when to take profits?

Walter: Well, it is probably not when you think you want to take them.

Hugh: Exactly.

Walter: There was a guy in the Market Wizards book. I think I do not know if his name was Larry Height but one of the guys in the Market Wizards books. He says, “Theoretically, I would have made much more money throughout my trading career but I just could not help but..” I am paraphrasing. “.. I just could not help but to hear the cash register ring.”

So he would just keep cashing out of these trades. Even though he knew if he had waited a bit longer and in the Reminiscences of a Stock Operator  which is the biography of Jesse Livermore. Jesse Livermore says, “There’s plenty of…” Again, I am paraphrasing.

“There's plenty of traders out there who have been, you know, bullish at the exact perfect time and been bearish at the exact perfect time. They've timed the market perfectly but it's very rare to find the trader who has the patience to hold on to those positions”. That is so true.

It is so true. The thing that we beat ourselves up with as traders is either like we have the fear of missing out on a big profit by taking profit too early. So we made a thousand dollars on a trade but we could have made six thousand if we had waited. Or, it is that thing where you had six thousand dollars on your trade but you waited so long to get out that it kept going against you. Kept waiting for it to go back and it never went and then you ended up with a thousand dollars.

As traders, I think you need to decide which of those is more painful. Having six thousand dollars literally in your equity, just as an example. Just pulling a number out of there and then losing. Watching that go all the way down to say you know let's say, three thousand. So you had six thousand in the bag. You never got out. It went down to three or you have three thousand.

You cash out because that is where your profit target was and then you watch it go another three thousand in your favor without you. You are like, “Ah!” In both cases it is the same thing. In both cases you've lost three thousand. Quote, “Lost three thousand dollars” but which one is more painful for you because that will determine how you should exit.

If you are okay taking three thousand and saying that I mean, more okay with losing out on that extra three thousand after you've cashed out three then that is fine. Then you use targets. You are a target trader. If however, you think that it is more painful for you or it's better for you, you are okay with having six thousand and then watching the market retrace against you. Finally getting out at three thousand and you can use trailing exits and loose trailing exits at that.

You can do both too. You can do both. I like to do both. You can have a target and you can have a trailing exit. That way you kind of feel like you are always right but that's not necessarily the best way to make money. It is not necessarily going to happen and that's where we get tripped up. We think, “Oh, we need to figure out the best way. The most profitable way.” No. You need to figure out the way that you are going to stick with.

You need to figure out the thing that you can do. Not the thing that is going to make you the most money because the thing that is going to make you the most money may not jive with your psychology. So that is my take on that. It is that you can do both.

I mean, this is really simplified. There are lots of ways. You can use timed exits. You can use exits based on the time like lunchtime. They are all going to lunch in New York so we are going to get out now. Or,  get out at the end of the day or, get out after x number of days or get out if the market hasn't gone after x number of days.

So there's lots of time decks that you can use. To which I think is a really cool thing but in a basic sense it usually comes down to letting the market go as far as it wants. To some sort of trailing exit or letting the market cash you out at a predetermined level, which are your targets. How do you see that?

Hugh: I totally agree. I think you have to specialize. You have to understand what your edge is and it's kind of like trying to be a doctor and a lawyer at the same time. That is not going to work so you have got to pick one. You are going to be the short target guy. You are going to be the long target guy or you are going to have something between.

I think one of the biggest issues with traders is that they try to do all of the things at the same time and they lose out on one trade because they missed a bunch of profit. They say, “Oh, I am going to switch back to the other thing” and then the other thing does not work. They take a small profit again and then they say, “Oh, I missed out on this profit again. So I am going to switch back to that.”

That is where you get into the cycle of losing and switching, and losing and switching.

Walter: Also, I think they fixed the last trade. So you have a trade that you take and then something happens. You watch the market go and you are like, “Oh wow, I only took 2R on that trade and it went 6R. So, next time I am going to use a trailing exit”. Of course what happens next time? The trailing exit loses you 0.2R you know 0.2R or whatever. Do you know what I mean?

So that is the problem I think we have as traders. We are always trying to fix the last thing and that is not the way to do it. We need to take groups of data and if you are going to make changes. Make changes based on chunks of data, not just one or two or three trades. You need a big chunk of trades that show you something and then you go, “Okay, maybe I should do this based on the last fifty trades” or the last hundred trades or what have you.

Hugh: I think that is just hard wiring to us. It is like you put your hand on a fire and you get burned. You are like, “Oh crap, I am not going to do that again.” So it is the recency bias I guess. The last thing that happened is kind of what we emphasize the most.

Walter: Absolutely, totally. Exactly and that serves us well like that serves you well in the jungle but not so well in the markets.

Hugh: True. Alright, cool. Thanks, Walter.

Walter: Thanks.

Hugh: All the information in this podcast is for educational and informational purposes only and is not trading or investment advice.

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