The hardest thing for any trader to do is to take a loss and move on. The temptation is to ride out a loser to see it turn into a winner. Does such a strategy make sense?
It depends on what your time horizon is for the position. Today in Gold & Energy Options Trader I closed two positions. The first trade I closed was position in Marathon Petroleum (MPC) Calls for April using the $61.50 Calls. When trading options the answer is clearly you do not want to ride out a loser as it will become a 100% loser or close to it very quickly. Moreover, a winner that gets ahead of itself needs to have profits taken completely or at least on half of the position.
Marathon Petroleum had a nice move to the upside and the gain got to be 25.88% so I shut it down. Why? I know that a big move the first day of a new trade can often reverse. At least 60% of my trades are closed in Gold & Energy Options Trader within a couple days.
In fact, an hour after I closed the trade both Marathon Petroleum and the overall market gave back a decent amount of their gains for the day.
The lesson in this trade is know how you make money and make sure not to deviate from the process. The second trade was a little different as I put on the trade on last Wednesday and it was a struggle. I had bought calls in the United States Natural Gas Fund (UNG) using the April $23 Call.
First, the trade made money, then it gave it back, then it became a little profitable. Today finally the position got to a 16% winner after being on the books for 5 trading days. So I closed it out and started to think about my next trade.
The gain was 14.14% and I was really happy to eliminate trades that combined for profits of 40.02% heading into tomorrow's Federal Reserve Open Market Committee (FOMC) meeting. The reaction to tomorrow's meeting could be a positive or negative.
That said,I would rather be on the backside of the reaction and then be a trend follower. Now all the decks are clear and I do not have to worry if my logic could be wrong heading into tomorrow.
Another important factor is that I have now put together three winning trades in a row over the last two weeks which means that my confidence is gaining. An increase in confidence often enables me to put multiple winners before that next loser rears its ugly head. So what can one take away from this article.
1.Now how you make money.
2.Understand when you style becomes vulnerable to a loss.
3.Sometimes it makes sense to move to the sidelines in front of a big catalyst and then pounce after.