One of the most damaging mistakes trader can make is becoming too attached to a position. Maybe they’re fan boys, maybe they hate the person on the other end of the trade, or perhaps their research is so awesome they can’t accept the fact that it was noise. Whatever the case may be, I think it’s paramount you take on a trading flexible trading style for supporting your thesis. For me, flexibility comes from scaling out of positions.
Let’s take today’s winner for example. I put a position on this morning in Zillow. I wrote a piece a few days back explaining my thoughts on trading this name to the long side. When the market confirmed my plan with buy flow this morning, I put my position on. I’ve learned the best trades are hard to grab ahold of. That was the case today. I was stalking, and as soon as I saw what I liked I had to jam the order in fast. The position worked right off the rip, and before lunchtime we are already at my first target.
At this point your mind starts messing with you.
I was expecting this move to take a bit longer than two hours to reach my target, obviously there is a strong demand for shares of $Z, so my mind says, “Aye, take your target and shove it in your cannoli hole.” My internal dialogue is always in an Italian-Brooklyn tone. This is me getting attached to a position. You know what comes next? A shameover © when the peak forms.
But I’ll be the first to tell you missing additional upside because you’re trigger happy can feel worse than a losing position. That’s why for me, the best methodology is to scale profits along the way. Everyone is different, but now I’ve already put bread on my table. If I want to stick with the position, my cost basis is now lower. Plus when this stock screams higher, I’ll keep getting paid.
I think most successful traders scale, but you don’t hear many of them preaching it. Define your levels, use the charts, and build and scale your position accordingly. This will remove any attachment to a single price level, and will keep your mind clearer to make better decisions.Comments »