The money is not yours until you take it
The scenario below is only relevant to:
- Where your target has not been met.
- When your target has been exceeded.
Yes – trailing stops do help – and you can leave a trailing stop to make the decision, which would be ‘your decision’.
But the point of this is to say that positive equity hides some important psychological issues and consequences – if you unknowingly allow psychology (i.e. emotions) to rule.
- You bailout too soon.
- You gain less than you should – and that’s fine if traders want to play it very safe (consistent small gains are far better than consistent losses).
The real issue which may seem pretty obvious is that positive equity is not yours i.e. you don’t own it until you take it. The importance of that is that new traders should not beat themselves up for losing a significant part of the equity.
The positive equity is there to tempt the trader to take the money. I’m not saying that one should not take the money. It’s about finding the right time to take it.
The right time depends on many things e.g.
1. Are you taking a long term position?
2. Are you willing to suffer loss of equity for a longer term position to come later?
3. Can you withstand the losses?
4. Can you stand falling out of position?
5. Do you know what to do if after taking the money price rockets upward (or downward)? Will you call it a day? Will you say ‘coulda, woulda.. .shoulda’?
All of the above issues and more apply only to where you’re target is not met.
The position below with Walt Disney is interesting – it remains on demo account which is now frozen for stock trading, so the profits can’t be taken. If the account was able to close the trade, I probably would have taken profits on several occasions. So this trade is rather accidental long term trade on a strong stock, shows how if left alone a small bet can amass tons of points (and equity).
At one stage in the last couple months, Disney had fallen to £300 equity. If it was a live account I would have been strongly inclined to take that money and run – thinking ‘Well it could go lower.. so I might as well take what I’ve got before I lose it all’. But because I had no way of closing the trade, it continued running and continues to rise.
This brings up the question of whether small trades on strong stock – with wide stops – left to run are a good idea. I don’t explore that here. But it’s worth considering if 50p can turn into £1200 in a few months.
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