When the index is up my portfolio will go up about 14% in a week or two with the overall market being up almost every day. Then the market will make a large pullback and I will either lose my gains and be forced to exit due to my stops or I will sell and lose all the profits. Then my account will bounce down about 10-14% or more on those down days. This has happened 4 times. It seems like my portfolio is going in a sideways trend. How can I keep profits while not risking too much? I seem to be stuck here. I have good risk management that I learned from losing a lot in 2008, so I’ve been very careful with my money. What am I doing wrong?

 Frank from Takeprofit, ID


Frank, what are you doing wrong? Sounds like you are doing most everything right, especially managing risk. The only problem I see is what many traders experience—the inability to take profit when profit is there to be taken.

One lesson I learned a while ago is that when I have profit, I take profit. I don’t hang around hoping for more. I know the maxim is “cut your losses and let your profits run.” The problem with this saying is exactly what you are experiencing. You are letting your profits run right into the ditch.

If you are trading (not investing for the long term), why on earth wouldn’t you take profit if you were up 14% in a week? Part of a good strategy is placing stops to prevent major losses. Another part of a strategy is to have an upside (or down, depending) profit target. When you hit that number, you take your profit, or you replace your stop with a tighter stop ensuring profit but allowing your market to move more.

Everyone knows that greed and fear drive markets. This is a shame because I believe that a third way to drive markets exists, and that is to trade in one’s best interest. Simply, if you are trading in your own best interest, you will not wait for a 14% profit to reach 15% or 20%. You will sell at 14%, take the profit, and make another trade.

The goal is to build your account incrementally, percent by percent. Compounding small gains over time is a stronger way to build your portfolio than to work for the “big” profit, in my opinion.  

Sometimes, it seems, taking profit is as difficult as cutting losses. It wouldn’t be if you were disciplined to set your profit targets and take your profits when the market hits the target, unless of course you have a runner, and in that case, simply move your stop to protect the profit and then just walk away.

Trade in the day; invest in your life …

Trader Ed