The back story: There’s an old saying in the stock market that goes like this: “If you don’t take profits, the next guy will.” I have found it to be true time and time again.
The lesson: Getting greedy in the stock market usually leads to losing money. That’s why it’s important to take profits and lock in at least some of your gains, especially during volatile conditions or when markets trade on lighter volume, like they do in the summer.
Here’s an example from my own trading. On Monday, I sold out of a call option position for a six percent gain, a modest win for an options swing trade. Yet if I hadn’t taken my winnings off the table, it appears that I’d be holding a red position today.
Every trader is going to experience both sides of trading, but in my time trading, I’ve seen how quickly you can turn a win into a loss. I’ve been greedy with green positions and let my winners run their way into the red. As a result, give me modest green positions and I will choose avoiding greed and simply getting paid every time the opportunity presents itself.
Any seasoned trader will tell you that you’re not going to get rich overnight. It is the consistent base hits — with the occasional homerun — which really compound a portfolio. I have read hundreds of trading reviews from members who have either gotten greedy and lost money, or played small ball and scored, in some cases doubling small portfolios.
The reason to remember it now: It’s summertime, when the living is easy and the volume lightens up. In these market conditions, it becomes even more important to pay yourself when you can. You can always revisit a trade should a similar pattern or set-up present itself again; I do this regularly.
Focus on your patterns, be satisfied with small gains and look to limit your losses. You’ll advance your portfolio, and no one but you will be taking your gains.
Davis Martin is the head trader at DaiyProfitMachine.com. He trades SPY Calls and Puts and swing trades mid-large cap stocks and stock options. As of right now he has no open orders but is looking to capitalize on a red move in the markets if it happens today.