Booking the winning trade too soon rather than holding it for the target price, shows the desperation and emotions driven decisions. However many trader suppose that avoiding the loss is the major challenge in the markets. Meanwhile cutting the winning trade in the middle becomes one of the major challenge for the beginner traders. It becomes more difficult after the few consecutive losing streak.
Booking the winning trade in between and watching the trade to reach to your target price becomes very regretful. Over the time habit may cause the major damage to your trading account and trading performance as well. Developing the deep understanding about why trade book the winning trade too soon, is first step forward towards overcoming from this challenge.
What Does Taking Profits Too Early Mean?
It states that taking the profits too soon rather than holding it for target price. By doing this, it generally disturbs risk to reward ratio and preventing the trade from reaching its full potential. However these type of decisions are mostly driven by the emotions. And sometimes it happens when a trade faces the continuous losing streaks and somehow want to end the trade in profits. Usually this habits are shown by premature trade who are new to the markets and have spent enough time in the markets.
Common Causes and Consequences
Afraid Of Loss: Premature exit from the trade instead of running it for the target price, show scareness of the seeing the loss again. After a few losing trade, when a trader see some profits, it develops the anxiety in them. As a result they book profits early rather than seeing profit turning into the loss.
Immediate Gratification: Human tendency for the guaranteed profits, result them them to book the trade too soon. Because they can’t bear the pain of regret of not booking the profits. If the trade turned out to be the losing trade.
Disturbed Risk To Reward: This booking the trade in between habits often make the risk to reward invalid. As the traders most of time book the profits below the 1:1. It means many time the traders didn’t recover the risk properly in the hurry of booking the profits.
Why Traders Take Profits Too Early
Booking the position too soon is the sign of weak trading psychology. However this weak trading psychology includes the scared of losing the trade and strong urge for the immediate validation. These types of traits shows the lack of discipline and the lack of understanding about the trading rules. That’s sign of the immature trader or the new comer trader in the market. Who thinks that the market is the quick generating money system.
Core Reasons Of Early Profit Booking
Afraid Of The Reversal: The pain of watching the green trade turns in the red, forces the trader to book what they currently have. This psychological traits limits the profits and increases the losses. Because you hold the losing position in the hope of reversal and book profits too soon before the target price. In the fear of trade reversal.
Absence Of Exit Rules: Trading without the pre defined entry or exit rules, in this scenario traders rely on the emotional driven decision. However this leaves a bad impact on the trading account and trading performance too.
Low Win-Rate Tolerance: The traders may maintain the high win rate by booking the small profits. But in order to grow the trading account you need to follow a strict risk to reward ratio. And pre defined set of trading rules.
Fear of Losing Existing Profits
One of the ordinary reason booking the profits early because they don’t wanna see existing profits getting disappeared. By overcome from this fear requires a strong trading psychology, confidence in the strategy, deploy mechanical trade management etc. By implementing this, you will start accepting the loss as the routine cost of doing the trading.
The Mindset Behind Protecting Profits
Loss Sensitivity: Human brain isn’t made in a way to bear the trading losses. When the profit appears on the screen, human brain’s tendency to lock it before it gone. Because the brain can’t bear the pain of the loss until your trading psychology isn’t strong enough to deal with it.
Bias Towards Existing Beliefs: Watching the continuous candle moving forces the trader to think what if it goes against me from here. This led to the potential big trades turns out to be the exit in tiny profits.
Implement Smart Strategies
Apply Trailing Stop Loss: Rather than booking the whole trade too soon in the fear of loss, use trailing loss limit. This Strategy will make stay in the trade till the target price without losing anything.
Execute and Let It Play Out: Once you entered in the trade, set the target price and stop loss and leave it. Let the market do the rest of the work.
Develop a Probability-Oriented Approach
100 Trades: Profitable trading entails the series of 100 trades. In those trades you will recognize the repetitive patterns, develop the mindset, discipline and the believe in the strategy.
Series Of Trades: Having a deep understanding about the fact the one single can’t make you profitable or losing trades. It’s a series of the trades which creates the difference between profitable trader and losing trader.
Practical Ways to Stop Taking Profits Too Early
In order to prevent yourself from booking the trade before reaching to it’s target price. Book the half lots at 1:1, this let you hold the trade till the target price because you have booked what you have risked in the particular trade. And if you are uncomfortable in doing this thinking that it will reduce my profits then opt for trailing stop loss method. In trading there is one line that is “protect your capital first then the profits will follow you”
Utilize Partial Exit Strategies
Scale Out Systematically: Always set the targets like book 20 percent at 1:1, then 50 percent at 1:2, 70 percent at 1:3 and let the rest of the quantity run till target price.
Why it helps: It gives the satisfaction to the brain by giving validation of booking the small amount of profits. Now the brain will let you hold the positions till the tp.
Adopt a Different Perspective
Avoid Hindsight Regret: Capturing the profits in the any trade, sign of a successful trading. But exiting the long position at the top of the market is improbable. Because nobody can guess the top of the market.
Track Trade Duration: Always differentiate between the early exits and the trade holded to the target price. Try to recognize the which setup make you early exits and setups which gives the target price.
Conclusion Lines
Booking the trade in between is a sign of the weak traders who has lack of discipline. This is what separates pro trade from the novice traders.
However cutting the winning trade in middle may feel good but in the long run it may impact the trading performance in bad way. Because you hold losing trade more and cut the winners in the middle stage.
Success in trading doesn’t only depends on the looking for the best entries. It’s about trusting the process and the strategy. And let the winning trade work for you.