In October last year, I was ruminating about how folks weren’t taking profits off the table…
At the time, tech stocks were flying, and gold and silver were starting to break higher. Bitcoin was well on its way to $126,000.
But I’d seen this type of euphoria in the markets many times before. I knew that excessive runups rarely end well.
Fast forward to today, and we can already see that playing out. Gold and silver have both experienced blowouts, and Bitcoin’s price got cut in half as of its recent low.
As for the tech high-flyers?
Well, Palantir (PLTR) lost one-third of its value, and Microsoft gave up nearly all of its gains since last April. Oracle (ORCL), which was pushing $350 in September, was recently trading as low as $135.
Countless folks are likely kicking themselves for riding these trades into the ground.
That’s why taking profits is key to becoming a successful trader. But the flip side is true as well.
You have to know when to cut your losses and move on to the next trade…
Many people refused to sell due to greed. They wanted to ride this crazy move as far as it could go.
Take Nvidia (NVDA), for example – the poster child of the AI rally. NVDA peaked back on October 29 at $212. Yet for the last three months, it has been trading in a sideways band.
Traders don’t have the luxury of tying up their money in the hope that a stock might break higher again – or worse still, watching a profitable trade turn into a loser.
I’ve managed hundreds of other traders throughout my career. Watching a profit turn into a loser causes them the most heartache – and it can really mess with their head.
Someone hanging on to the hope that the market will swing back their way is distracted. They’ll miss out on other potential profitable trades.
Plus, losing trades tie up capital in a trade going nowhere. They also run the risk of a manageable loss turning into a catastrophe.
That’s why I’ve never been afraid to take profits. Each profitable trade is another run on the board. I’m not overly concerned about leaving some profits on the table.
But more than that, I learned to take my losses on the chin. I didn’t waste a second fantasizing about what might have been.
Most folks are familiar with using stop losses. Stop losses are a predefined exit strategy to help limit your losses. And importantly, they help take emotion out of the equation.
But I suspect that emotions are tangling up many retail traders right now…
When I look at the huge drops in gold, silver, and Bitcoin, I can see that plenty have ridden them all the way into the ground. We just haven’t seen the same volume exiting these trades as when buyers were in a mad frenzy.
Those who bought into silver above $100 or Bitcoin above $100,000 are now sitting on painful losses. The losses are so bad that some may choose not to look at them at all.
But blind hope isn’t a successful strategy. There’s always the possibility that these assets won’t trade at those levels again. Investors may never recoup their money.
So if you’re holding on to a loser, waiting for a bounce that may never come… my advice is to reconsider.
Sure, it’s frustrating if something rallies after you sell.
But it’s even more painful to let a loss grow so large that it puts you out of the game.
Instead, learn to take your losses quickly. Serious traders understand that losses are an inevitable part of the game.
In the end, taking losses helps protect your capital and ensures you’re ready and able to jump on the next opportunity that comes your way.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. On Wednesday night at my Wall Street Money Calls event, I shared my strategy to turn earnings calls into trading opportunities. Unexpected results, CEO slipups, and the like can send stocks soaring or plunging double-digits… and if you use eight key signals to identify trades, you can potentially make much, much more.
The replay of this event is up for a limited time. So if you missed out on Wednesday, be sure to watch Wall Street Money Calls now.
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
