D is for discipline, continued…
How do I establish discipline around profit taking? This is the most important step in not just your trading but also your risk management. So let’s dive into the conversation.
The idea is to pay yourself while you can and not when you have to. The idea itself presupposes that you have a level at which you’ll scale out of the trade, regardless of how the market gets there.
So why is that important…?
A lot of times, the market might rally or have a very large candle while it’s getting to your target. The first thing that runs through a lot of traders’ minds is, “what if it keeps going higher?” Now there’s a greedy factor that influences your decision to pay yourself.
Here’s how you can make it easy.
And here’s the discipline notice….
I say, scale out, not get flat. Getting flat means you’ve sold your entire position.
Countdown Fun Fact: By the way, if you only have one unit, my advice is to pay yourself because you’re in the process of building your account or building your confidence and taking profits out at that first target is going to help both.
But, what if you have multiple contracts or multiple lots? Now you can scale out.
When the first target is reached, scale out of 50% of your position. Now again, here’s the important part around the discipline of not only paying yourself, but protecting yourself. We want to then move our stop loss from the risk based level that it was when we first got into the trade to a breakeven level.
At this point, we are now only risking unrealized profits or house money. However you want to look at it, we scale out of 50% of our position which reduces our risk allowing us to pay ourselves. We then move the stock to breakeven.
If the market were to simply tank from your first target, all you’ve risked is money that you really didn’t have. It was an unrealized profit, meaning you aren’t losing your capital. Remember, you’ve already taken half the position off the table.
That trade is a winner, which goes back to never letting a winner turn into a loser. That’s how you do it, but only if you pay yourself while you can, not when you have to.
Now, what does that mean?
If you wait for the market to roll over, you and everybody else will notice this bearish momentum. The frenzy to get out of the trade starts to create more bearish momentum and your exit will be lower because everybody’s seeing the same thing.
Everybody’s seeing that bearish momentum, which means taking profit while you can and not when you have to. You’re proactively exiting while the market is in your favor. Now this is especially important for my options traders.
I say that because the momentum that you’re looking to liquidate, your 50% of options position in, is going to be done at the offer.
I won’t dig too deep, but think of it this way…
If you’re offering out your contracts, you need that bullish momentum to get a fill at that higher price of the momentum. Now the way in which orders are executed (keep in mind you want that momentum) again pay yourself while you can, not when you have to.
We covered how important that is for options trading. That could be an options day trade, or that could be an option swing trade.
What about day trading?
In day trading it’s important to be proactive about executing an exit (or a target when you have the wind at your back). The market can move against you very quickly, we’re talking about very short-term interval candles. It’s more important that you have predetermined levels that you can place a limit order to liquidate the 50% of your position.
The reason isn’t only because day trading can move very quickly, higher or lower, you also don’t have as much unrealized profits. Additionally, now we’re talking about intraday price movement and perhaps not daily or weekly price movement.
This is because you have smaller sums of unrealized profits that you’re dealing with — that you’re managing.
It’s important to be precise and disciplined.
Join me at Sector Secrets Mastery where you will learn the art of discipline and risk management. Your trades should consist of more winners than losers, if you know what to do!