When trading – investing in the financial markets, it can happen that we start to panic, when our open position brings a considerable profit and a dilemma arises: what to do? Secure a small profit, or maybe close the entire position?
If you start to panic when you have an open position – something is wrong. Your position is probably too large compared to the capital you have in the investment account. This is true whether you are managing unrealized gains or losses.
Let's take as an example a person with an account of 100 thousand euros. Do you think he would panic about a position with a profit of €1000? Will he be tempted to close his position simply because he is afraid of "losing" these unrealized gains? Probably not.
Now, if we compare a person with an investment capital of 100 thousand euros with a person with only 500 euros, it will become obvious who will be more afraid and secure a profit of 1000 euros. Finally, excessive position size relative to your account size is the main cause of emotion trading – investing.
However, this is only one of the reasons why a trader-investor may be concerned about the management of unrealized profits. There are also several other as well as possible solutions that we will discuss in this article.
What's the plan?
The best way to avoid panic in any situation is to have a plan. In fact, this applies to everything you do in life, not just trading – investing.
Before you start trading – investing, you should have a plan. Otherwise, the risk is simply not worth it. A plan allows you to follow logical steps. It's also the only tangible thing you own that was created before you risked your capital.
You see, the moment you risk money, you are no longer neutral. As soon as there is money in the game, you have something to lose and that can influence your decision.
Meanwhile, the trading plan was created before you risked anything. It's the only thing that will keep you calm and clear when the market moves against you. Or worse, when something really starts to go wrong.
Trust me, it will happen eventually. It's not a matter of if, but when, which is why a plan of attack is so important. It doesn't matter how you create it. This can be an Excel spreadsheet, a Word document, a notebook or a whiteboard. The main thing is that you have it.
A trading-investing plan also doesn't have to be complicated or very detailed. All you need to do is include your reason for entering the market, a few key levels, and an exit strategy. In fact, we encourage you to keep it simple. The more complicated and time-consuming it is, the less likely you are to stick with it in the long run.
Once you have a plan, it's just a matter of seeing what the market is doing and following what you've written. Has the instrument's value fallen below a level contrary to your idea? It may be time to close your position. Has the fundamental level been breached in the direction of your trade? Maybe it's time to replenish the position. Has a reversal signal formed against your position? Maybe it's time to get out of the deal.
You should know the answers to all of these questions before you pull the trigger. Of course, you need to track the specific price levels of the instrument you are trading or investing in.
Remember, the better prepared you are for all possible outcomes, the less likely you are to panic while managing an open position. You will no longer have to guess or let money control your decisions. Instead, you can just stick to your plan and move on.
Don't risk everything you have
In the US there is a saying "don't mortgage the farm". It is especially popular in the South, but is suitable for everyone, regardless of activity. This means you don't risk everything you have because you're not sure of the outcome.
One of the most common mistakes among traders and investors is to overleverage your account. In other words, it takes too large a position compared to the size of their capital.
If you find yourself making decisions based on the profit or loss of an open trade, try cutting your risk in half. So if you were risking 5 percent of your capital, reduce that to 2.5 percent. Even if you're only risking 1 percent of your account, but you're still panicking, try reducing it to 0.5 percent. The idea is to keep the risk so low that neither fear nor greed affects your trade.
The road to success in the financial markets is a marathon. It takes years, not days, weeks or even months. Those who treat it like a sprint will fall flat on their faces before they even reach the finish line.
Forget about making money
The previous topic is a great follow up on what is probably the most important mental shift you need to make in order to make money in the financial markets. Stop focusing on money. In fact, forget about them altogether.
Of course, the amount still needs to be taken into account when calculating the position size. But as for trying to multiply that money, don't even think about it. This is one of the reasons why we advocate against services that offer trading signals. The main factor for those who pay for such a service is to make money.
This is a big mistake. This goes against everything every successful trader-investor has been told. Those who come into this business to make a quick buck are chewed up and spit out. And that's putting it mildly.
Do you want to know how to make money in this business?
First of all, forget about making money. As long as you are focused on becoming the next millionaire in the financial markets, you are preventing the objective mindset necessary for success.
Second, start focusing on the process.
Do you have a trade-investment plan? If not, you better select it.
Are you committed to a certain trading-investing style, or do you change indicators every week?
Do you consistently use 4 hour and daily intervals? Have you ever cheated?
How do you control risk? Are you sizing your positions so that fear or greed don't control you?
Are you patient enough to choose only quality models in the market that meet your requirements?
These are just a few things that will eventually make you money. Meanwhile, focusing on profit tends to drain your account, not increase it.
Realize partial profits
Here's one last practical technique you might want to try. Instead of holding your entire position, experiment with partially closing your position and taking a profit. For example, if you have a 100 pips stop loss, try to realize half the profit when the instrument moves 100 pips in the intended direction. You can then leave the second half to use up the rest of the movement.
Some trader-investors use this technique successfully. This takes the pressure off and theoretically makes it a risk-free trade.
But there is another approach. As long as the instrument moves in the intended direction, thus confirming the idea of the trader-investor, then the position is added rather than reduced. In this way, the profitable trades are maximized so that they can cover the losing trades. It's the old 80/20 rule that says 80 percent of the profits come from 20 percent of the trades. Some months it is even more skewed.
However, as always, you should experiment with different techniques. This is the only way to find what works best for you. You may find that partial profit realization is the way to go. Or you choose to maximize your winning trades by increasing rather than decreasing your position.
Ultimately, trial and error is the only way to find what works for your personality.
Summary
One of the best ways to avoid panic when managing profitable trades is to have a plan. Be sure to create one before entering the market so that you have an objective plan for each situation.
The road to profitable trading – investing is a marathon, not a sprint. Don't overdraw your account. If you are facing a profitable open position of 1000 euros with 500 euros in your account, you will definitely panic if the market moves slightly against you. Keep your position size small to reduce the risk of emotional trading.
If you want to earn consistently as a trader in the market, you need to forget about making money. Instead, focus on the process of becoming a profitable trader. Do this and the money will come.
Be sure to try different methods of managing profitable open positions. There is no one best way, only the one that works best for you.
Prepared on the basis of foreign websites
