I had an email recently, from someone who had been watching one of my videos and wanted to know why I had closed a trade when I did, instead of letting it run on all day. I wanted to post my reply here, because this raises a few important points. As a bit of background, the trade in question was one I entered relatively late in the morning, and only whilst waiting for a different trade to come to an end. The trade was a short and I made a tidy profit. By the end of the day, the stock had fallen lower so there was clearly more profit to be had. Here’s my reply:

There are three angles to this. The first is that you have to have a clear objective for your trading. For me, I trade because it gives me more free time (not money) than a day job. So my objective is to be out of the market as soon after 11am as I can, so the rest of the day is mine. On that basis, I’m not looking to enter new trades as late in the day as I did yesterday – I only took that because it was staring me in the face, and I had a few minutes to kill as I waited for the others to finish up.

Of course if your personal objective is to make as much money as possible, then you may well want to hold much longer. For me though, time spent with my family or doing stuff I enjoy is more valuable than time spent in front of a screen for a few extra dollars in the bank.

The second angle is the trade strategy itself. I haven’t looked at aapl [the stock] since I closed that trade, so I don’t know how it went, but I’m guessing it probably wasn’t a smooth ride down to that low. It’s easy to look at any chart after the fact and say you should have stayed in. But when you’re in the trade, you have to exit based on the prevailing conditions. Now aapl yesterday is an exception for the reasons I mention above, but in general, many of the stocks I exit go on to make new lows or highs later on. However, my exit is still valid because at that particular time, I have an exit signal. In other words, you have to have a strict set of rules and always trade within them.

Which brings me to the third angle. You absolutely cannot get every bit of potential profit out of every potential trade. You can only be watching so many charts at one time, so you will miss other trades. That’s part of the business. By the same token, you cannot get every cent out of every move. This is where so many traders get it wrong – they believe they must be in at the very start of a move, and out right at the end. But that’s nigh on impossible. It’s much much easier to take the “easy middle bit” of a move. Get in and out with room to spare. A few of those will, in the long run, net you more profit than trying to pick absolute tops and bottoms.

Taking a loss is part of trading, and missing out on potential profit is also part of the business. It’s too easy to look back at missed profits, but we rarely look back at missed losses. For every exit I take where the stock continues and would have made me more profit, there’s an exit that if I hadn’t taken, would have turned my trade into a loss.