Overcoming The 3 Hidden Obstacles to Good Profit Exits

• There are 3 major obstacles to being able to execute profit exits well, with the first one of those obstacles directly influencing the other two.


• Obstacle #1: The myth that it’s wrong to let a winner turn into a loser.


o This is a common piece of trading “wisdom”, and yet it’s one of the most harmful pieces of advice out there. The traders who originally said it failed to explain its true meaning, and as often happens it got misinterpreted and now stands as a trading myth that most traders unfortunately believe in.


o The belief in this myth means that most traders mistakenly think that any time they have a decent profit it’s wrong to let it turn into a loss. But thinking in this way will create very bad trading habits because most trades (especially in rotational markets like the stock indices) will have decent retracements as they move to your objective. And if you’re always worried about letting a “winner” turn into a loser, you’ll be too quick to move to break-even or scale out and this will hurt your bottom line greatly.


• Obstacle #2: The fear of regret and your own negative self-talk.


o As a result of believing that it’s wrong to let any winner turn into a loser, you will naturally feel great regret when you do. You’ll feel bad about yourself and think of yourself as a bad trader, and you will often blame yourself and beat yourself up emotionally and psychologically.


o The obstacle arises not so much because of the regret and negative self-talk themselves, but rather due to your fear of them. You’ll intuitively know that you’ll beat yourself up if you break this supposedly sacred rule of not letting a winner turn into a loser, and you know you don’t like that feeling of being harsh on yourself. Given this, you’ll unconsciously want to avoid it. And what’s the way to avoid it? Simply by avoiding that which gives rise to it. And so you make it your goal to never let a winner turn into a loser, and in doing so you trade scared and do all the things that will hurt your bottom line, like scaling out too often and too fast and moving your stop to breakeven too quickly.


• Obstacle #3: The fear of losing something you have acquired.


o This draws back to loss aversion bias, but now affects you in the realm of profits. Missing out on a point of profit doesn’t hurt nearly as much as losing a point of profit you already had. So there’s always a natural tendency to want to lock profits in and not lose them even when the potential reward that is left in the trade is much larger than the current profit.

• Solution #1: Change the rules of the game.


o The great traders weren’t wrong- they just didn’t explain what they meant very well. You need to change the rules of the game to get back in synch with what they really meant. And to do that it’s necessary to define what a winner truly is. A winner is not simply a profit. Rather, it is a trade where the market has moved enough in your favor that if it were to return to your entry point it would be indicating that your market view is now no longer valid. If you have such a winner, then it’s wrong to let it turn into a loser.


o Another way to change the rules of the game is to only look at things from the market’s perspective. Your P&L doesn’t determine whether it’s wrong to let a trade turn into a loss; the market does. For example, it would be wrong if you are in a trade with a profit and the market is now displaying strong signs that your directional view may no longer be correct. In that instance it makes sense to take profits, or scale out, or move your stop to break-even.


o In both of these points, we do not exit a trade simply in fear of letting a “winner” turn into a loser. There is no blind belief in a trading adage. We only protect profits when we have a true winner and when the market tells us to. And this becomes our new rule, and now we don’t feel bad when any random profit turns into a loser. We only feel bad when we break this rule. And we feel proud when we uphold it. In this way, the game gets redefined to our benefit, and we even overcome obstacle #2 because now we have nothing to feel bad about unless we truly break the real rules which we won’t be inclined to in the first place since they’re very logical and are based on how the markets actually work. The new rules literally change our psychology.


• Solution #2: Practice self-awareness.


o Solution # 1 takes care of the first two obstacles. This second solution takes care of obstacle #3. Being aware that you’ll have a great tendency to not want to lose the profits you’ve acquired (even when the correct trading process is to let your profits run), you’ll  catch yourself when you start thinking such thoughts as “a bird in the hand is worth 2 in the bush”. That may be true in life when opportunities rarely repeat themselves, but in trading we get trade after trade after trade. All we need to do is the correct thing regardless if it
yields profits on this particular trade or not. And so being self-aware will allow you to catch  these thoughts as they arise so you don’t let them cause wrong trading behaviors.

Posted by Victor Lew

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