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Are you taking profits too early?

 

 

 

Many traders fail in the market for two primary reasons:
1. They don't cut their losses when the trades go against them and/or
2. They cash out their winning position very early.

 

 

For those familiar with trading using correct candlestick charting analysis, the first reason is easy to overcome. They know precisely the point at which the stop needs to be placed to get out of a losing position. (For those who want to learn more on stop loss settings, Profitable Candlestick Charting's Basic and Advanced courses are an easy and fast way to learn). It doesn't take too many unchecked losing trades to wipe out one's confidence and portfolio.

 

 

While you are clinging to 'Hope' in the above scenario, the second reason is more because of clinging to 'Fear' of losing profits. As someone smart said, 'The losers hope for their losses and fear their profits'. Rest assured this will lead to eventual ruin in the marketplace.

The entire premise of succesful trading is based on keeping more of your profits and entertaining small losses. This is best implemented by correct knowledge of candlestick chart analysis. Properly analyzing in each time frame of trading, as to who is in control (bulls or bears), one can let profits run. For those who have this knowledge, but fail to follow the rules of your system, keep these few scenarios in mind.

 

 

Assume you have some profit in your position.

Scenario 1: You follow your system and decide to let the profit ride. Next day, the stock falls and you get stopped out leading to a small loss or breakven. This is a correct approach. You are following your system rules and will assure your losses are small.

Scenario 2: You follow your system and decide to let the profit ride. The stock proceeds to do what you anticipated, leading to higher profits. This will assure your profits are fatter and you will become more confident in your trading and your system.

Scenario 3: You disregard your system and decide to take your small profit, even though your analysis does not show any reversal. Next day, the stock continues its trend and you are left out of it. You will lament the fact over and over that you did not follow your system and missed the stock run. This will damage your confidence (and your portfolio). You will pledge to follow the system from the next trade and eventually get over your emotional turmoil.

Scenario 4: You disregard your system and decide to take your small profit, even though your analysis does not show any reversal. Next day the stock falls and you feel happy that you decided to take your profit. Of all the four scenarios, this is the worst one. This momentary happiness of beating the market is like a virus. It will now establish a false sense of belief that the market rewards indescipline. Your profits will be shorter and will never cover the unavoidable losses. This will eventually wipe the trader out of the marketplace.

 

 

At Profitable Candlestick Charting, we put prime importance on capital preservation through the use of proper stops, whether to cut losses or take profits. The stops are intrinsically related to the candlestick chart analysis.