Handling an unexpected windfall profit that exceeds your initial expectations can be quite tricky. If you have not yet been in that position, it is only a matter of time before you are, if you are sticking to a written trading plan and devoting your attention to improving your trading methods. Without a written trading plan, I can guarantee that your win was a total chance occurrence. Without defined rules you will lose in the markets over the long term.
Reward Yourself
‘Reminiscences of a Stock Operator’ has been a very influential book for me. First published in 1923, it is a biography of Jesse Livermore, a great trader who built his fortune and lost it several times. Jesse stated “There isn’t a man in Wall Street who has not lost money trying to make the market pay for an automobile or a motor boat. I think the resolve to induce the stock market to act as a fairy godmother is the busiest and most persistent”. When trading in this deprived/depraved state of mind, we hope, we gamble, and we run much greater risks than if we were speculating dispassionately. This certainly echoes my own experiences.
However, if you follow your trading rules and experience a windfall profit but you do not reward yourself, you are setting yourself up for failure in the future. Our subconscious is responsible for many aspects of our success, so if you do not reward your own good behaviour, you could very well sabotage your future trading. As with a child, you need to be rewarded when you do things well, or you will be less likely to repeat that behaviour.
Take a small percentage of your winnings and buy something for yourself and your family. Whenever you look at that asset, or remember that holiday, you will create a feedback loop where your subconscious will seek further rewards. This is one of the reasons why winners in the markets go on to create even bigger wins in the future, and losers continue to lose money.
Take Partial Profits
When experiencing boom times, you may want to consider taking a partial exit from your position to capture some of the profit. If the trend is in place, it may not be the best strategy to exit fully, as there may be more profits on the way.
Think through the related issues with each of these ideas. Some traders argue against partial profit strategies – so you will need to work out your own personal comfort level with this concept.
Use a Trailing Stop Loss
A trailing stop loss will assist in preserving your profits. This type of stop moves up under the price action to lock in your profits as the trend continues to unravel. Learn how to set a stop and then follow it. Contrary to popular belief, if you exit on the basis of a stop loss, the world will not abruptly stop spinning, flinging you into space… but you will live to trade another day. If you can keep investing in the markets for long enough, you are bound to learn the secrets about how to succeed.
Beware of Overconfidence
Feel free to beat your hairy chests men… your testosterone levels helped get us out of caves and into centrally heated houses. Unfortunately, primal urges have to now be disguised as more sophisticated behaviour – such as bragging to your golfing partners. It can be difficult to remember to be humble when everything that you’ve recently touched has turned to gold.
Some people feel the need to gloat after a big win. This is definitely a sign of the evil ego-bug! If you feel the need for external validation, tell your dog or your teddy bear. Resist the urge to brag. It won’t assist your trading in the long run. Give yourself a pat on the back, but don’t expect others to share your enthusiasm – jealousy is a terrible thing.
When I started trading, after almost every major sharemarket win that I made, I experienced a losing streak. I am not ashamed to say that the main reason that this happened was due to an inflated ego. Eventually, I became determined not to judge my next trade on the basis of the last trade that I made. Smash your rear view mirrors.
When our self-worth is attached to whether we are making or losing money, it is a symptom of a very shallow inner life. The best traders stay loyal to their trading plan, take entry and exit signals without question, and have a money management system that minimises the risk of taking any particular individual trade. There is no room for the luxury of ego.
The sharemarket has nothing in common with a Tattslotto ticket. With trading, you can attribute a profit to a back-tested system, and therefore, ultimately duplicate your results in the future.
To register and subscribe to my monthly email newsletter called ‘The Trading Game Newsletter’, visit www.tradingsecrets.com.au. You will also receive a free copy of a Trading Plan Review to help you design your own trading plan.
Louise Bedford (www.tradingsecrets.com.au) is a full-time private trader and author of the best-selling books - The Secret of Writing Options, The Secret of Candlestick Charting, Trading Secrets and Charting Secrets.
© All rights reserved 2004. This article has been prepared by Louise Bedford and licensed to ASX. The views are those of the author and not necessarily of ASX. This material is educational and it is not intended to constitute financial advice.
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