How do i protect my profits?

Tuesday, 24th March 2009
Lessons

Profit Protection

How do i protect my profits? Protecting Profits for all traders whether new or experienced is an art. It is as precise as finding your initial exit door when you initiate a trade.

A trader goes through 2 important phase of his trading life 1) Accumulation 2) Distribution . It will help you better understand how to protect your profit when you categorize yourself in either of the categories.

1) Accumulation
This is a phase where all new traders starts off with. At this stage the trader has limited resources and limited room for errors. Here is where 95% of traders fail and tend to be disheartened with their result.
From the diagram it illustrates how the trader is trading. He manages his pool of resources and trades accordingly. With each trade he is trying to maximise his returns from each trade. The key important lesson here would be to understand that you are in your accumulation of wealth phase where both capital protection and profit protection is essential.

Let’s look at the end of week 1 trade. Trader A trades Options and has the following results illustrated. Trader A should essentially manage his profit protection properly. He has a few trades that are very profitable. His profit ranges from 100%-10%. He also has some tiny losses that range from -5% to -10%.

First he needs to manage his profits. Trader A needs to prioritize his profit taking in a systematic way. First analyze current profit situation. Address those that are deep in the money to those just slightly in the money. Profit taking is purely about how comfortable you are taking what’s on the table. Traders usually mismanage their profits till it becomes a loss. I need to emphasize this point. At this stage if you have profits when you get stopped out it should be a stop for profit taking not stop loss. While at this stage address what is your stop for your profits, this can be based on the stocks that you are trading or be based on how much you would like to walk away with for e.g out of the 100% profit i would like to walk away with 70% of profits and out of 50% of profit i would like to walk away with 40% of profit. Keep cultivating this habit and you will find yourself accumulating wealth at a steady pace.

2) Distribution
This is a phase where new traders goes to from accumulation of wealth to accumulated wealth. At this stage with the accumulated wealth, the trader needs to be selective over the trades he participates in. The trader needs to identify trades that allows him to maximize his returns with minimal risk. As you can see the diagram illustrates that the trader is going through the same trades as Trader A but he is only interested in maximise returns. This could be done through Double Leverage or Triple leverage ETFs or even Commodities Futures. Here Profit taking is even clinical and precise. Zero room for errors or complacency.

What i am driving at is, identify the stage where you are in and act accordingly. Do not opt for the playing fields of a trader in the Distribution phase when you are at the Accumulation stage. You will be severely humble by Mr Market if you do so.

Hope this helps and if you would like to share your opinion please do so within the comment box.




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5 Comments

  1. Gimo Ng says:
    March 24, 2009 at 9:41 am

    I hope you could have tell me this earlier in such details. Well… now everybody learned. Very cool and precise write up~

  2. Ken Lau says:
    March 24, 2009 at 2:49 pm

    This is powerful! Different strategies for different stages in a traders path towards success … but with the same emphasis on minimizing losses.

    Very often, what may seem obvious is often not so. This is a universal problem that applies to everybody regardless of their intelligence and experience; like the emperor and his new clothes. Traders are more susceptible to this as they often operate alone.

    Common sense is not so common after all.

    I like the graphics too. NIce.

  3. MX says:
    March 25, 2009 at 7:02 pm

    Thanks for your sharing Imral! Agree with Ken, the graphics are clean and very nice. Thanks for putting across the concepts in a clear and simple way. It is so true that 95% of people get disheartened when they start off by allowing profits to swing into the negative zone! These 2 concepts are like ‘maps’ for traders.. Really appreciate your sharing.

  4. Celia says:
    March 26, 2009 at 7:19 pm

    After last night this concept is more clear for me, thanks Imral. You did share this method to us, but some how we just got those we wanted, and untill encounter such problem then realize the mistake, do not look at one tree must see the forest. Your sharing is Cool….. common sense but we just…..:&

    Late understanding is better then never. We have to go throught this path, but I am enjoying this journey, is amazing! Future is more and more brighter and clearer for me now. Thank you Shifu.

  5. Clement says:
    March 28, 2009 at 7:53 am

    Very Nice of you to share…. no thought I just read half (slow reader), I feel great…will complete sooner… Thanks a lot…

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