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Dealing with losses is one of the most challenging aspects of trading, but it''s not the only one. Dealing with profits can be just as challenging! It is very uncomfortable psychologically and many factors come into play that tend to cause traders to take profits early, thereby taking less than full advantage of a trade, or holding on too long while waiting for a larger profit.

Consider the typical thought process many traders go through when dealing with an open position. Assume a position has gone against the trader. As the loss gets worse, they become more and more afraid to take the loss because of what it will do to their overall account. Finally, they are sure that it is unlikely that it can go any further against them without some recovery, at which time they fully intend to exit. But as it does recover they hesitate some more while they hope that it is now going in their direction.

When the pain of the loss finally becomes great enough that they can no longer deny it, they close the trade. The point is that the trader needs to exercise strong discipline. By far the most stressful thing about trading is sitting with a losing position, that, if you had followed your system’s rules, you would have already been out. The more the trader resists taking the sure loss, the more they become a victim to the psychological traps that keep them locked into the position. The only way to get out of the trap is to let go of the trade. Do not let it devastate your account.

In addition to the financial effect of letting a loss grow is the negative impact it can have on one’s self confidence as a trader. You can lose your confidence and courage, which are so critical to taking decisive actions necessary to get into the next trade.

For the most part, profits are pretty comfortable. Letting your profits run is the fun part about trading. But the markets are not so well behaved that there aren’t setbacks in these positions that cause anxiety. It is particularly bothersome as pullbacks occur near an anticipated profit point. The trader can get anxious to try to pick the exact end-point of the price move, expecting to maximize the profit.

As uncertainty sets in near the turning point, and the trade is at a nice profit, the tendency is strong to take it. Taking a profit before your system rules indicate to do so may occasionally give you a slightly larger profit than waiting for the signal. That’s what reinforces this behavior. But there are many more times when the move resumes strongly in the direction of your trade and you have only realized a portion of the profits.

The other common tendency is to wait too long and to hesitate after the signal because you have some notion that the move hasn’t ended. This is particularly true when the move has been small, and you can’t accept that it’s over.

As traders, to avoid these profit and loss traps, we must follow are system rules on getting in and out of the market with strong discipline. Don’t deceive yourself that this time you know better than the system. It is not a question of admitting being wrong. Let the system take the responsibility for the trade. Do this on every trade and you will have gone a long way in effectively coping with your account equity graph.

Happy Trading.

Jeff Neal 
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
Visit Jeff’s Forum
Listen to Jeff at www.ProfitStrategiesRadio.com

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