Taking a pre-defined loss is part of the business. Exiting a winning trade and watching it continue to work without you is part of the business. Missing an opportunity is part of the business. Many traders cannot accept these realities of the trading business because they have a need for perfection and a need to be right.
Consider the following: You aren’t sure if you should scale your last unit at your target because you notice that momentum has increased and it looks like it could keep going beyond your target – do you hold it? Flatten at your target?
To know what to do, you need to answer the following questions for yourself. First, which is more painful to you…..exiting at your target and watching it run further? Or not exiting at your target and watching it come back in? You also need to know what your default action is when you experience different types of discomfort. Is that typical response of yours adaptive or is it emotionally reactive? Only you know the answer to this question; and it behooves you to know.
This is one amazing question. I sat here for a good 10 mins typing and retyping my response. I encourage everyone who reads this to try and write out an answer.
If I think my stock could go further I scale out 1/2 or 3/4 and ride the rest. If the rest comes back in it tends to bother me and affect my mood. However, if I sold my entire position and it kept going I wouldn’t really care.
So are you saying that if it pains me for it to come back in, I should always sell it all at my target? What if I’m trying to grow as a trader and I feel like scaling out is an important part of that?
Wow this is such a good post.
Eric,
Great, I’m glad this is thought provoking for you, that was my intention.
I’m not suggesting you need to sell simply because the price action is
causing you pain or discomfort, the critical part of your decision should
really be based on at least one of two things (both ideally): 1) your
knowledge of your own default action script….understanding the way you
typically irrationally react (take action in response) to this type of
discomfort; 2) understanding the context of the feeling (the discomfort) by
examining yourself to see if this feeling is associated with some previous
negative event, trading or not (significant memories carry more of an
emotional charge and have a bigger impact on us subconsciously).
I also share your belief that learning to scale out is an important part of
a trader’s development, its one of the ways to learn to hold winners longer.
As you face the decision to scale or not scale at a particular point, you
can use the above two ideas as guidelines for yourself.
Andrew
I will make those factors a part of my trading process. I look forward to sharing my findings. Thank you.
My pleasure.
Andrew
Dr. Menaker,
Update:
I’ve worked with this question since I read this post several months ago. Understanding the answer to this question has definitely made a difference in my PNL. Especially with how fast algos are moving; If you see your position move to a certain price and you become elated by that, the pressure/pain of losing those “profits” will certainly get to you when the price moves equally fast away from it.
Yes, that is so true, Eric. And when you’re aware of your emotions, it takes one step closer to being able to choose your reaction (behavior) in response the emotion.