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Wednesday, May 23, 2012

Be Slow to Take Profit

Be slow to take profit and quick to take loss.  Well, that's one of the trading adages.  Supposedly, if one heeds the adage, even if one is only right 3 out of 10, he can still make a small fortune. We tend to do the opposite: take profits too quickly and sit on losses too long.  Aside from fear and greed at work, for me jinx make it especially hard to execute.  Think about it.  Why did we condition ourselves to do the opposite?  Well, easy, empirical data by way of experience. Once we see the profit turns into loss once too many times, we begin to take profit early.    Now the whole thing is a big topic, so I am just going to focus on a small facet of it.

I am usually very quick at taking profits.  But this time I said to myself, I am going to be patient and ride on my winner -- shorting AAPL at a good entry of just below 560 (see first yellow arrow).   The whole morning I had several opportunity to take profit, but I held my urge.  Every time the green dissipated, it was painful.  But I said to myself, no pain no gain;  this is what one needed to go through to get bigger gain.

Now the horizontal resistance was finally breached.  Guess what?  TraderFlorida, the AAPL guru, actually talked down about the volume, or the lack of it as usual.  So I actually added to my short position when it went up again because I don't see volume confirmation and the price could be just running on fumes.  Then it actually popped out of the rising channel, WITH VOLUME!   I finally bailed, successfully in turning a profit into a loss.

Lessons learned:

  1. Own your own trade.  Listening to others will only confuse yourself.
  2. Never let a winning trade turn into a losing trade, even if it means exit at breakeven and lose the profit.
  3. The adage does not account for how often the draw-down exceeds cost before the target is reached.
  4. Jinx is well and alive. All the pain endured didn't pay off.

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