How many times we have heard this simple rule of trading? A rule often used in trading that acknowledges the tendency among traders to sell winning positions too early and while they also hold onto losing positions in the hope that the stock will come up quickly.
Most traders tend to take quick gains off the table so early out of fear that the Profits will evaporate quickly.The key to letting your profits run is to not to panic when volatility increases and to maintain your convictions about why you entered into the trade.
To explain this, I am giving details about a recent trade done last week, by one of our friends. As you can see the trade is a short sell one. The stock – Akruti – shorted at Rs.2100 and covered at Rs.1600 (the stock fell Rs.550 that day). Though the quantity traded might be small, one needs to look at the way it has been traded. The position was not closed for just 100/200 profits, but the profits were allowed to run almost entirely.
Cutting your losses and letting your profits run is nothing more than making decision about the trade before the trade has been initiated. When attempting to make all these decisions during the trade, you get yourself into trouble and make emotional decisions.
Define your discipline prior to investing/trading and not after.