4 Tips for Taking Profit

Market Meditations | April 28, 2021

Losses are impossible to avoid for any trader. Even the very best are prone to errors. Critically, the best are not scared of making mistakes or even losing money in the markets. They understand that each mistake is an opportunity to learn: both about themselves and the marketplace. Recognising that the marketplace itself is nothing more than a culmination of ideas, mistakes and beliefs. All that being said, it can help to be prepared. If you have some knowledge of common trading mistakes, you can face them in a calm, open-minded and rational manner. 

In today’s article, we will warn you of common trading mistakes we have come across these last years and how to address them. 

? Letting Your Losses Run

“The simple truth is that most people are risk-averse in the realm of profits—they prefer a sure, smaller gain to a wise gamble for a larger gain—and risk-seeking in the realm of losses—they prefer an unwise gamble to a sure loss. As a result, most people tend to do the opposite of what is required for success. They cut their profits short and let their losses run.” – Market Wizards

MISTAKE. When it comes to trading, protecting your capital is always the top priority: no matter what, you will need to live to trade another day. Perhaps we would all do well to change our mindset from winning to not losing. 

SOLUTIONS. Set a stop-loss on your exchange. All your trades should have an invalidation point that is predetermined before you put your money (and thereby your emotions) into play. Respect your stop-loss level given your invalidation point. Don’t end up in a position where you are holding a losing bag. Accept losses while they are still small and deploy your time and energy into other trades. If you would prefer not to use a stop-loss, you can also reduce your position sizing. Such that you enter with a very small position size that you are willing to let go to zero.

RESOURCES. Check out our video: Only Stop Loss Guide You’ll Ever Needand learn from interviews with experts on why cutting losses are so important: Lessons from the World’s Greatest Traders.

? Cognitive Biases

Every day I assume every position I have is wrong.” – Paul Tudor Jones

MISTAKE. There is a saying that traders have an easier time divorcing a spouse than they do a position. This point speaks to cognitive biases. Our biases can heavily affect decision making, cloud our judgement and limit the range of possibilities we are able to consider. As far as possible, it is essential to keep an open mind. Market conditions change very quickly. In fact, change is the only certainty. So we would do well to recognise and adapt to changes. 

SOLUTION. Have a range of technical and fundamental resources that you check regularly. Use these resources to try to take the other side of your trading strategy. As far as possible, look for potential weaknesses in your current bias. When your confirmation is no longer there you are left with but one option and that is to close your position. Close it confidentially, logically and unapologetically. Time is your most valuable asset, don’t waste it on a losing trade.

RESOURCES. If you rely mainly on technical analysis you may want to consider fundamental indicators such as On-Chain AnalyticsNansen.ai is a great place to start for this. Beyond this, dive into twitter, discords and telegrams to gauge market narratives and hot topics.

? Overtrading and Revenge Trading

“Do Not Trade Everyday of the Year” – Jesse Livermore

MISTAKE. Overtrading is a sin we all may be found guilty of. Particularly in bull markets, where there is a heightened sense of FOMO and missing the next big altcoin pump. This is also more common amongst newcomers who are very eager to trade to be active in the market. It’s important for all traders to remember that you don’t need to trade everyday. In fact, a lot of the time, it’s best not to trade. Contrary to popular opinion, trading involves a lot of analysis and a lot of patience. Some traders enter a handful of trades a year and make significant returns. In a similar fashion, revenge trading entails immediately trying to make back a significant loss.

TIP. Beginners would do well to note that low time frames produce a lot of market noise and may tempt you to enter trades more often. Lower time frames are risky and analysis done on higher time frames tend to be more reliable. 

SOLUTIONS. For the majority of people, a simple buy and hold strategy is advisable. If you do want to trade actively, however, it’s important to determine what style of trading suits you best and to only enter trades that have a higher probability of success. As for revenge trading, the market is no place for emotions. Any guesses what trading immediately after a big loss will lead to? Even more losses. You should only ever approach your trading screen with a clear mind.

RESOURCES. To determine what style of trading suits you best you can take our quick Quiz. For an understanding of risk, reward and probability of success, check our video: Risk to Reward Ratio, Expectancy and Risk of Ruin. Finally, for more on controlling your emotions there is a wealth of Trading Psychology books such as Trading For A Living. Alternatively, you may decide to practise mindfulness: just 10 minutes meditation a day can have serious benefits.

? Herd Mentality

MISTAKE. Entering a trade based on someone else’s analysis may work in the short term. However, if you blindly follow others without understanding the context, you can be sure it won’t work in the long run. Whilst there is much to learn from others, it is essential to only select aspects you agree with and what fits in your own trading system.

SOLUTION. Rather than looking towards others for a trading strategy, consider the free resources available to develop your own. Familiarise yourself with the various tools for assessing the markets and begin to consider and test your own trade ideas.

RESOURCES. We have a free Technical Analysis course available on YouTube. We also provide a step by step tutorial for keeping a trading diary. There are a range of software packages to create trading diaries online such as Edgewonk.