Friday, May 25, 2012

Exiting a Profitable Trade

Another problem that regularly comes about for a trader is to follow the plan through to the end and allow a winning trade to fully work in ones favor. Jeff Gundlach was on Bloomberg this morning and was asked an excellent question by Tom Keene:

Keene: (On Gundlach’s call to go 100x short $AAPL and long natural gas $NG_F which is +24% since he proposed it) “How do you get out of a trade like that? When does Jeff Gundlach know when to exit a successful trade?”

Gundlach: “The biggest mistake that investors make when they’re in a winning trade is to get out too soon…”

This is absolutely 100% true. What makes investors get out of a winning trade too soon?

#1. Fear of losing the profit

#2. Psychological need to be right, taking the profit satisfies a deep-seated intellectual need to be “right” even though it may end up being the wrong thing to do

#3. Paying attention to some extraneous new piece of information that may or may not be material to ones trading plan


Jitender Yadav said...

Respected Sir,
You are absolutely right about the three reasons which make a trader get out of a wining position early. When a novice is in loss he will become optimistic and hopeful that at least the trade will get to breakeven level and then he will exit. In a winning position the novice will become fearful and pessimistic and will book profits as soon as they are there, afraid of losing those small MTM profits.
Your Fan
Jitender Yadav

sanraj said...

Yes sir. Every trader would agree to that point.

In fact , I think it is the dis belief in the market that make people exit too soon. They think that the market move in favor of their position is temporary and hence not to be "trusted". This could be because of their past few bad experiences. So , since the market for some reason gave them a profit and their lack of trust in the market make then safeguard their full profits by booking it full ( than keeping a trailing stop loss, which require to be contented with a lesser profit if hit)

Similarly when the market goes against you and you are in a loss , still for the same reason - mistrust in the market- you assume that the loss is temporary and it may reverse, and you hold on to your losing position and lose more finally.

In both cases ( quick exit when in profit and holding on when in loss) can be attributed to ones lack of trust in the market moves and trends and ones unwilling to to accept a possibility of 1.Less profit-lose in profit- (keeping a tsl, when in plus) and 2. A loss (when in loss)