Seven Bad Habits of a Trader: Trading Habit #2 – Selling Too Soon

Trading habit #2 - Selling Too Soon

We have all felt the disappointment of not selling a stock at the high. When a stock is marching higher, we set a point where we intend to sell so that we can lock in the gain before it goes down. The problem is that after we sell the stock, it continues to go higher leaving us with an opportunity missed.

Selling too soon is a problem that I continue to wrestle with after 10 years of trading stocks. I want to lock in that good feeling of taking a profit off the table. I want to avoid the negative feeling of watching a good profit get cut in half by a rapid sell off. And so, I break my selling rules and sell the stock in anticipation of weakness, rather than when the market tells me I should. I have improved leaps and bounds over the years but I am still learning.

The result is that profitability over the long term is not maximized. Once in a while, I may get out of a trade at a better price than I would if I followed my rules, but over 10 or more trades, my net profitability is not as good as if I had maintained my selling rules. Keeping in mind that trading stocks is a probability game, it is important to maximize gains on the winners so that the inevitable losers can be overcome.

The Solution

There are few things that can help you avoid falling in to this trap. First, go through a number of past trades and apply your selling rules to see what your net profitability would have been if you have been disciplined, and compare those with what you actually achieved. I did this and it gave me powerful proof that maintaining discipline pays off, and is worth striving for. In fact, when I did this over one particular one week period, the difference amounted to a pretty nice new car! That gave me the leverage on my emotions I need to overcome them.

Second, turn off the profit and loss indicator that most brokerages and trading platforms give you. How much you are up or down is irrelevant to the decision making process. Since we have an emotional attachment to the money, knowing that we are up a certain amount and then seeing that shrink on a normal pull back in a stock leads us to make an emotional decision.

Finally, remember to sell at floors, not ceilings. Do not limit the upside movement of a stock by setting a price target, but instead, limit the downside movement by setting a price floor. Sell a stock when it pulls back to a floor, rather than selling it in anticipation of it reaching a ceiling price.

All the Best
Suresh

Have a great weekend and week ahead! :grinning::pray::raised_hands::love_you_gesture:

for those who missed out on earlier post,

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Thank you for the post:) Setting a target can really be dicey!

There are a couple of things I did when it came to setting a target depending on the type of trading day(range-bound or trending):

  1. If it’s a range-bound trading day, then I usually set a % as my target. 0.6% - 1.2% is a probable % gain in the stocks I trade.
  2. If its a trending day, then I sell when I see a reversal pattern on the top for a buy position. The % gain depends on when the reversal pattern happens.

If you feel anxious waiting for a reversal pattern during a trending day, then one could probably start selling partial quantities along the way. So you know you are taking profits and also letting a bit run to the end. Both ends are satisfied!

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@Srinivas…Thanks for sharing…I also do have
a habit of booking partial profits…And as you mentioned it is always dicey when it comes to exits… again thanks for that wonderful and practical response

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Thank you, sir =)

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