In trading, I think there are two types. The first is those who simply invest for the long haul. They buy, hold, accumulate and work on creating the sizable next egg. And then you have the active trader. The person who puts money into the markets hourly, daily, weekly, monthly in attempt to generate cash flow.
My perspective is, as traders, we should strive for both. We should always have that nest egg, retirement approach; the longer term, bigger perspective fund. Maybe where we simply buy into the S&P index at massive supports and go to cash at the all time highs planning to buy that next dip. However, when you are actively trading, many traders forget to take out profits. They envision taking that $10,000 account into a $100,000 account in one year by doing credit spreads or directional option trading. Mathematically it can be done.
This is Real Life though, and we must remember there are other facets of life and different avenues of wealth creation other than the stock market. I personally find it best to reward myself each month for following my plan. Literally, pulling out some profits, or cash, out of my account each month, even if it’s just $100.00.
What I see happen the most is a trader will take their account from $5,000 to $8,000 in a month. They will become exuberant. That trader will feel the $3,000 is sheer house money. They begin to trade differently that they did previously: taking different trades, mixing up their strategies, trying new things and inherently, risking larger sums simply because their account has almost doubled. From there, the account drops back to $5,000.
How does that trader feel now? They oftentimes get quite upset that they didn’t “lock in” some profits. Then they try and get that $3,000 paper loss back, by being impatient and taking aggressive trades. The account now drops to $4,000. Now it becomes panic mode and eventually the $5,000 account gets blown out.
This is really one of my stories from years back. But it’s a story that’s been retold to me by others too many times. How can it be avoided?
Here are my 4 points on taking profits:
- Try and create a small, realistic positive goal each month
- Even if you didn’t have a massive gain, or you broke even for the month, if you followed your plan and didn’t become irrational, reward yourself
- Pulling out actual cash from your account and spending it links positivity to doing the right thing
- Make the money real. Do something with it that you’ll be reminded of often. Buy a new fridge or dishwasher. Re-do the cabinets in your house.
- Have an actual written plan with real rules to specifically follow, and then follow them. If you follow them at the end of each month, reward yourself or others.
To get more insight on the truth behind trading in small account, click this link to read the story and advice I gave to another trader who experienced this similar journey.
Thanks for reading, traders! Enjoy your upcoming trading!