Eckhardt on taking profits

“One common adage on this subject that is completely wrongheaded is: you can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.”

No other quote illustrate better my trading during the last two weeks. I was right 14 times in a row, but my account didn’t appreciate significantly due to my premature exits. It is true that my timing was often correct as I was lucky to exit minutes before my position turned against me. This especially well relates to my countertrend trades. But it is also true, that I left too much money on the table by jumping out of stocks that were just beginning to move; trades that for some reason were all in the direction of the trend. In hindsight, I realize that I wasn’t chasing profits. I was trying to be right as often as I could, often scalping for meaningless profits.

Then on my 15th trade I took a big hit, that wiped out half of my two week profits. I made all the mistakes that an amateur could have made. Initiated a position in a leveraged ETF not for a day trade and not to hedge my other positions. Entered a trade that was in the opposite side of the prevailing trend. Essentially I bought the rip – the very place that professionals often use to renew their selling, as it offers excellent risk/reward. I put good money after bad by averaging down in a losing position. I did that even after realizing that my position in a 3x ETF should be three times smaller than the average position I take due to their extreme volatily. I turned a trade into an investment. My initial entry was profitable and I had the opportunity to exit with good gains two days in a row. I didn’t. I saw my position going against me and instead of exiting immediatelly I decided to buy myself some cushion by selling front month OTM calls against my equity. The cushion wasn’t enough, so I averaged down. I created a position that would be normal for my other lower betta trading vehicles, but way too big for this leveraged ETF beast. Last Friday I exited with a 2.5 points loss.

It’s much easier to learn what you should do in trading than to do it. Good systems tend to violate normal human tendencies.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

You might be interested in:
blog comments powered by Disqus