Investment Myths - Myth 4: You can’t go broke taking a profit
You can’t go broke taking a profit
From a certain point of view, it’s true that you can’t go broke taking a profit. However at the same time, you may be preventing yourself from getting rich. If you are holding a profitable stock, your broker will persuade you to or agree with taking the profit simply because he/she can take the commission earned from the completed transaction. Secondly, brokers may want to recommend another stock for you, as they make money from securing a sale.
Newcomers often can’t wait to take small profits from a trade. This results in winning the small profits, but losing a prospective large profit. . Although a small profit is indeed still a win, it’s not always the short winning we should worry about, rather, we should endeavour to focus on maximising our profits. Because the opportunity of a growing stock and growing profit is more difficult to come by, it is invaluable that we maximise the potential profit during this time frame. Therefore, it may be a mistake to sell stocks early and take profits prematurely. Having said that, the best traders in the world still make mistakes and not all their trades are winning trades. However, they still make money because they have foresight to cut losses short and reduce total loss prices, and let profits run to maximise winnings. They lose small, win big. With this trading principle, you may cover all your small losses with one single winning trade.
Most importantly, do not be governed by emotions. Many investors close the winning positions too early due to the fear of losing their winning trades. These type of investors will tend to hold onto large losing trades as well due to fear of losing the whole trade and clinging onto hope of it bouncing back. This causes even further, more damaging loss. A savvy investor will not panic when the price of a stock is shrinking because he has risk management strategies in place to cut losses before they decline beyond his tolerance level. He will also maintain a clear mind to let the profit run when it should and only close the position based on a strategy plan; selling when the various signals present themselves. Letting profits run requires courage but it will pay off and build your conviction.
All trend analysts know correction is part of market movement. If you are familiar with the market, you would know that the price usually pulls back even in an up-trend market, before it breaks a new high. Market correction is inevitable and should always be expected.
Therefore, it’s important that we know how to gauge, and have a good understanding of the market volatility to avoid the mistake of taking profits prematurely.
Overall, trend analysis is vital in helping you develop a better trading strategy to maximise your profits. Not being governed by emotions, having a strategy plan in place, minimising losses and maximising your profits are smart ways to increase your trading successes. In the next topic, we will examine buying cheap stocks.