Investors and traders often sell their winners too soon and leave money on the table. This is so common as people become excited once they have a winner and enjoy the feelings associated with realizing gains.
On last night’s Market Shrinkology program I reviewed the psychological causes of this tendency and outlined 4 things to focus on in order to help you let your winners run.
1. Position Sizing – If you are habitually selling winners too soon, you may want to trade smaller at least until you have mastered the discipline of letting them run.
2. Concrete Exit Plans – Once you enter a trade, your psychology changes as a result of either having a winner or loser. Rational decision making becomes more difficult. By establishing a concrete exit strategy before you enter a trade (and sticking to it), you will be better positioned to exit when the time is right and not when you are impelled by emotions.
3. Visualizing and Journaling Past Successes – Establishing a vivid memory of instances in which you were successful in letting a winner run provides a mental blue print for your actions once you are in the trade. Journaling the episode enhances your memory. If you have never successfully let a winner run, make one up or steal a story from someone who has.
4. Risk Management – Pairing a winning position or trading around it goes hand in hand with responsible risk management. Establishing portfolio rules around risk will help you maintain rational control once in a position and will also help you maximize winners.
For a much more in depth discussion on this topic, here’s the video from last night’s program:
More on Letting Winner’s Run:
Letting Profits Run: A Guide to Becoming Your Own Trading Coach (Dr. Brett)
The Disposition Effect (pbs.org)
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