I’ve noticed a lot of traders that I see online and complain about “how are we supposed to know when to sell X?” and etc. I see people let their emotions guide them and results in them not selling their positions. Knowing when to cut losses & take profits is very important for every trader to understand. You can never let your emotions dictate your action. Leave all those emotions to the side, because if you know how to cut losses & take profits, you will be a very successful trader. I’ve got some great personal examples that I would love to share with you guys, so you guys won’t make the same mistake as I did.
The general rule of thumb is usually taking profits when your positions are up 45% from initial purchase. Now, 45% might not seem enough for some and they might tend to get greedy and hold forever. That is a very stupid thing to do. One reason behind this usually comes with the following reason: F O M O. Having fomo thoughts about selling/buying stocks is probably one of the worst feelings ever. Here’s an example of what you shouldn’t be complaining about
- Let’s say you sell X amount of positions at a price of $50 per share.
- Your initial investment was $25 a share, so you’ve already doubled your money.
- Unfortunately, after market closes, the price of a share hits $55 and opens the next day at $60 per share.
- Seller starts getting FOMO and starts having these hypothetical situations where they start thinking about the “what ifs”.
- Seller now knows from now on, they will hold for a longer time in hopes of making more money
Mentioned above is probably one of the most common examples of FOMO and sellers doubting their ability to take profits. I’ve mentioned previously that if you’re already up 45% from your initial positions, it’s a great time to start thinking if you want to sell and claim profits. Never have fomo even though you’ve made money already. You’ve made your moneys worth already. Stop complaining. You can’t dictate the market and assume things will go your way IF X happens, leave these hypothetical situations out. Being greedy will NEVER go in your way and will always backfire.
You’ve made your moneys worth already. Be glad that you aren’t losing money.
Here’s an example of a recent trade that I made where even though I could’ve doubled my money by the end of the day, I still took profits relatively early.
So I held these calls throughout the July 4th weekend. My initial investment was $715, but I turned that into $1228, leaving me with profits of $513. (equal to 70% gains from initial investment) Although I could’ve doubled my money at the end of the day, I’m still satisfied that I was able to take my profits and not have fomo looking back. Why? Because in the end I still made money.
Cutting losses sounds easier on paper than doing it. Action definitely speaks louder than words in this case. I can not stress this enough but, ALWAYS HAVE AN EXIT PLAN. Know when you are willing to cut losses and just take the loss. Do NOT sit through it and let it bleed profusely. Cutting losses is significant to know when playing options. My general exit plan is when I’m down 30% when I’m playing very expensive options. Here is one of my recent examples.
- Purchased a $2300 8/21/20 Call @ Strike Price of $68
- Seeing that this call was OTM and Tesla was doing horrible before earnings, I decided to cut losses and sell @ $53.10
- After earnings, almost every Tesla premiums took a beating.
I was overthinking about me selling my call way too early at first, but now I am extremely grateful that I was about to cut losses real quick and didn’t want to see what would happen if I had held on to it. Tesla wasn’t going to hit back to $1700 during the week. No way. So a week later (today), I decided to check the price of the $2300 8/21/20 call and I was shocked to see the strike price.
Look at that. $7.55 for this same call. I sold it last week at $53.10. Had I held these calls into the week, I would’ve basically turned $6800 to $715 within a week, which equals to losing 89% of my initial investment. Absolutely insane. This is why knowing when to cut losses is very important. I ended up taking the risk of only losing $1500, which is better than losing $6000 throughout the week.
“But what happens if I wanted to let it ride until the expiration?”
Well you’re lucky I got an example covered for you for this question. Enjoy this lossporn. Take a look below at one of my more stupid gambles that I did earlier in the month. When Tesla was surging almost every other day, I thought it’d be wise of me to be one of those short sellers. Turns out I ended up getting screwed in the end. Let this be a lesson to also teach you to NEVER GAMBLE TESLA WEEKLIES. 2 birds 1 stone essentially.
- Purchased a $1160 7/10/20 Put @ Strike Price of $25
- Initially, I was down 30% when the market opened up on 7/6, but I was curious to see what’ll happen if I held on to these near expiration
- I ended up holding as much as I could until Thursday morning, and ended up selling the sucker at a price of $.75.
So because of my idiotic thought process of hoping Tesla would just tank at the last day of the week, I turned $2500 to $75 within a week. Not the greatest feeling in the world. Basically lost 97% of my initial investment from holding this weekly. I didn’t cut losses and decided to hold until near expiration. Don’t be an idiot and do something stupid like me. Know when its a right time to accept the loss and move forward. Don’t let it bleed throughout the week.
Even if you’re up 500% on your positions, trust me and take your profits by closing out the positions. You will never know what’ll happen the next day. What if suddenly there was a correction for the market and DJI along with SPY takes a beating, leaving with your 500% potential profit to only turn out to be 27% gains. Never get too greedy. Profit is profit. As long as you aren’t losing money, you can never complain about being too greedy with your profits and gains.