I went on a hike with another trader this morning and we were discussing many of the common pitfalls we each fall into on a regular basis when it comes to position management.
We were discussing how most successful traders will tell you that holding the winning trades is often the hardest skill to learn. It doesn’t come naturally.
While in theory, it sounds like holding winning trades would be a good problem to have. Trouble is, it’s not. Often times when I get into winning trades, every single bone in my body wants to sell, or at the very least, take some profits. Deep in the recesses of my brain, signals are being sent to the forefront reminding me of the feelings of past trades that started off great, only to quickly fizzle and reverse on me hard before I had the strength to pull the trigger and get out. I’m constantly being reminded of those frustrations and it’s like there’s a little devil sitting on my shoulder whispering in my ear: “You’re not gonna let all these profits evaporate again, are you dummy? You better cut and run, pal!”
This got me thinking: The reason holding winners is so hard — is it because my mind is only thinking about the inevitable pain I’ll surely suffer when this trend I’m in reverses? And if that’s it, WTF do I do that to myself? How and why do I assume that I know the trend is going to end soon. How can I be so presumptuous to think I know this trend is ending soon and taking my profits with it? Maybe the trend is just getting started and something truly epic is in store?
And why am I afraid of giving back potential open profits from higher levels that I don’t even have yet? Seriously…. WTF?
Where’s the optimism?
The simple truth about making money trading in any time frame is that the math works best when losers are cut quickly and a handful of large winners are allowed to run wild. It only takes a couple trades to make my week, month, or year. I might do 400 trades in a calendar year and its very likely that only 20 of those trades will represent all of my profits for the year. Unfortunately, my crystal ball doesn’t tell me ahead of time which of those 400 trades will make it into the Winners Circle. So I have to keep throwing shit up against the wall and hope some of it sticks.
But there’s no chance of gaining any of those big wins if I’m constantly looking for the exit the moment is starts showing me any meaningful profits. Looking for the exits is no way to ride a trend to the moon.
For the math to work, I have to be willing to suffer reversals of open paper profits. The only way to enjoy a 10x gain on the capital I risked in the trade at entry is to endure painful pullbacks. No stock doubles in value without frequent 10% pullbacks, very likely 20% shakeouts, and the occasional 50% retracement freakout. It’s the cost of doing business of riding trends.
It takes courage to be a pig, Stanley Druckenmiller once famously uttered.
Being aware of my shortcomings is the first and most powerful step to take in making a meaningful change. Being reminded of some of my shortcomings in recent weeks has me exploring some new paths to mitigate and turn these shortcomings into strengths.
I couldn’t be more excited about the possibilities. More to come on that…