Awesome Article which will be very relevant to CareClix shareholders who invested in the last year or two:
Selling Too Early
Sometimes, patience in trading is a virtue.
By JAMES "REV SHARK" DEPORRE Apr 25, 2015 | 12:00 PM EDT
Stocks quotes in this article: AAPL
"I made a fortune getting out too soon."
--J.P Morgan
A common complaint I hear from traders is that they take profits too quickly and miss out on further gains. It can be a particularly irksome problem when we have a good trade and claim a big profit, but then watch a great stock run many multiples higher. Most every active trader has a story about how he flipped a stock like Apple (AAPL) when it was in the single digits for a quick gain and would have made millions if he had simply had held on.
The ironic thing about the "selling-too-early" problem is that it tends to be most common among traders who are generally successful. As the old saying goes, you don't go broke taking profits. Good traders know the value of selling and often tend to sell first and ask questions later as they consider their trades.
Less successful traders are more likely to err on the side of holding onto bad stocks. When faced with difficult or stressful situations, some traders freeze and do nothing. Rather than lock in some small gains, we simply sit there, and that is when the big losses occur. What wipes out more traders than anything else is doing nothing, or, even worse, adding to positions as a stock trends down.
While being quick on the sell button is an attribute of good traders, it still is an issue that requires balance and needs to be addressed. You aren't going to run up really big gains if you constantly give in to the temptation to sell the moment you have a profit. We always want to cut losers quickly and let winners run, but putting that idea into practice is the most difficult thing to do in trading.
One strategy employed by some momentum traders, such as Louis Navellier, is to stay nearly fully invested at all times. They will sell a stock only when they find a replacement that they think is better. That approach forces them to hold onto positions and not to give into the natural impulse to take a gain just to be doing something. Their mantra is that there is always a bull market in something. Of course, the downside is that in a poor market, it can be very hard to find any good places to hide, and cash may be preferable. There are almost always a few stocks working, and if you force yourself to be invested, you may work harder to find them.
One reason good traders can still do well -- although they tend to sell too early -- is that they are constantly seeking new ideas. If you sell a good stock early and find something better, that is a positive, not a negative. Good traders may lament selling a winner, but they often overlook that they still have their capital employed. Keeping that cash hard at work as much as possible is the key, and selling too early isn't a problem if you have a steady flow of new ideas.
To effectively address the issue of taking profits too quickly, we have to consider what drives us to do it. For some traders, booking a profit is tangible proof of success. We feel good when we realize a gain and tend to want to do it regularly and frequently. Unrealized gains just don't provide the same level of satisfaction. We all know how stocks can slip, but once we actually book a gain, it can't be taken away.
When we couple that desire for tangible success with the tendency to want to be active, it is no surprise that we often take gains too soon. Traders like to trade and they often have a hard time being patient in a slow market, especially when we have a decent gain staring at us.
The perception that traders are constantly doing something may be true if you are a high-frequency trader who is scalping for pennies, but if you have a time frame of more than a few minutes, you will need to learn patience, as well. Good traders have the ability to be calm and do little, and then shift into action mode when the circumstances are right.
One way to combat the inclination to be busy is to make partial sells and buys. Don't sell your whole position. Trade around it and use a more patient strategy with the core position as long as it meets your criteria. With this approach, you learn the rhythm of a stock and can be aggressive with additional buys or sells as the stock develops. The best trades often come in stocks that you know well and are able to approach with more aggression.
Simple self-awareness is the best way to deal with premature selling. You have to be prepared to ask yourself exactly why are making this move. Do you have a plan for the cash? Do you think this is a major top? Are you looking for reentry at a lower price? In many cases, we never think beyond the fact that it simply feels good to take a gain.
If locking in gains too early is one of your biggest trading problems that is probably a good sign. You have the right mind-set for trading, but you may need to tinker with it to optimize your results. Like most things in life, simply being aware that it is an issue you need to address is a big part of the battle.
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At the time of publication, the author held no positions in the stock mentioned.
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