SamLau said:
Hi all,
So i have read this line in many books and in forums "let your profits run"
I bought some GPT one month ago @ 49c and it has hit highs of 56c and then floated in between those 2 points. So I was at one stage about $1200 in front and today only $400 in front. After 1 month, i've only gained 4%.
My question is:
* Should i sell off and find some other stock that is moving. eg (GMG) or be patient? Im letting my profits run but it aint going anywhere :|
What would an experienced trader do?
Thanks in advance
The meaning of let your profits run can be explained by the following scenario.
Lets say that you buy two stocks ABC and XYZ.
After one month ABC has gone steadily up by 15% and XYZ has gone steadily down by 15%.
Human nature tends to be to hold onto both - ABC because its in profit and looking like its going to keep rising, and to also hold onto XYZ hoping it will recover back to breakeven. (if either one is more likely to be sold at this point it is probably ABC to take the profit - people don't like realising losses).
But lets say neither are sold, and two months later things change: ABC has pulled back and is now only up by 7% and XYZ has recovered a bit and is now only down 7% from its starting position - what does human nature tend to do here?
It tends to be scared that the profit on ABC will end up disappearing altogether and so to sell ABC to lock in some of the profit, but hang onto XYZ hoping that it will continue to recover so that no losses will be made.
Now three months later ABC has continued its uptrend and is now up by 30% while XYZ has continued its downtrend and is now down by 30%.
Inexperienced trader has locked in 7% profit on ABC and has let their losses on XYZ run to 30% and still has open losses on this trade.
An experienced trader is more likely to have set an initial stop loss on both and possibly a trailing stop once either were in profit. The initial stop will have had them selling XYZ well before it got to down by 15% (so lets say they took a 5% loss on XYZ some time during the first month). If they set no trailing stop then they still have open profits of +30% on ABC after three months. On the other hand if they set a trailing stop they may have locked in a profit on ABC of around say 12% during the second month.
Of course there are plenty of scenario's where the experienced traders approach will happen to produce a worse outcome than the inexperienced trader - but as a general rule the fact that the inexperienced trader is letting emotion drive their trades means they are more likely to cut their winners and let their losers run than the alternative and so overall are more likely to underperform compared to the disciplined approach of the experienced trader.
So as most responses have said, the most important thing is to have a plan around the trade prior to entry that includes your reasons for making an entry, the timeframe you are targeting for the trade and what your exit critieria will be (note that exit criteria can be something technical like a stop loss or a chart signal, or it could be some change in the fundamentals like an interest rate rise or fall or a change in the companies operational performance etc.).
Its your system so the rules are up to you - the most important thing is that you trade it objectively and avoid the emotional pitfalls, and that you review it if it isn't working.