Trading is a game of managing risk. Easier said than done, this involves a huge amount of discipline and emotional control. It requires one to quantify the risk involved in a given trade setup and then manage the same with diligence. Once achieved, this then becomes the stepping stone to trade the markets without fear.
The other emotion that rules the market is greed. Fear is far easier to overcome than greed. This is simply because fear can be controlled but greed cannot. The moment a trader puts his stop loss in place his risk is controlled and so is his fear of losing the trade.
But when the trade starts moving in his direction and the profit counters are flashing green repeatedly, the trader loses all control of himself. His desire for more keeps him hoping that the trade will continue in his direction forever. But naturally, it doesn’t. The move stalls and the price starts reversing. Blinded by greed, the trader refuses to accept that the move is over and hopes for a turnaround once again in his direction. The price doesn’t turn and soon the green counter turns red only to grow a few shades darker.
Booking profits and exiting a trade is as important as taking a timely entry with a proper stop loss. Little do traders understand this and give up all the gains which otherwise would have made them richer.
What is the reason one enters a position?
A trade is executed only to realize gains. And when the trader sees those gains he refuses to book his profit in the hope for more.
Greed is good but foolishness is not.
A professional trader not only executes a winning trade but also realizes the gains and books of his profit. Many traders book their profits outright whilst some prefer to book partial profits and continue in the trade. Yet others trail their stop loss and move along making sure to lock their profits. Whatever method a trader may adopt, the common aspect to their trading method is that they do not give back what they have gained and make sure to exit without a loss.
A penny booked is a penny earned. A dollar locked is a dollar locked. A rupee in the kitty only adds up to one’s wealth. Nobody ever became poor by booking profits!