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The Insatiable Thirst to Book Profits

Sep 1, 2015 | Dr C K Narayan | Long Term Impact | 5 Comments

The Insatiable Thirst to Book Profits

The urge to take profits when we see them is so very strong that almost none are able to withstand it. They are gobbled up soon as they show even if we know that we could get more. Our justification in doing this could be any one of the following

I need the money

It fills the hole created by last week (month/year) loss to some extent.

What if it goes away?

The last time I did not take it, I regretted it.

And such other. One is not overly perturbed by this action, even if one knows that it is not correct. We rationalise that by saying, “How can profit booking be wrong? That’s what I am here for, after all!”

But that’s precisely the problem. In our glee to grab what is available, we take in a series of small profits. But when it comes to losses, we turn lethargic and then comatose. The losses balloon and become so big that they erode all the profits made and still create a big hole. Now you have a huge problem. There is a big hole and that now needs filling. The only way to do it is to take in profits as and when I fill them! This is the classic debt trap in another form! It is doomed to failure. The more you book small profits, the more you cap your gains and never allow them to become bigger so that the hole can be filled faster. Instead, the attempt is to fill it faster with smaller profits. That would work if there is a control on future losses not becoming big. Now, here is the real deal- because there are losses existing already, one cannot afford to take the next loss! As a result, you allow that loss to remain, then it grows bigger and now you cannot take it for sure. Then it grows some more and now there is just no way that you can take this loss!! Finally, it becomes so large that you cannot now afford to let it be there anymore!! What a turn of events! End result- the hole has become even bigger, putting even more pressure on the need to grab the small profits.

How does one get out of this vicious cycle? One way is to reorient the mind and see the new profits as what they are- profits. Not something that atones for last week’s mistakes. If you remain a “recovering” trader, that is, linking current profits all the time to some past losses, then understand that it would be well-nigh impossible for you to ever become successful at trading. See the new profits as something created by something new that you did (which has nothing to do with what you did in the past). See it with eyes that ascertain whether there is more available, whether the market is willing to give you more. Many times, the market is ready with more but you are never there to receive that largesse. Most of us make decent trades, many of which turn into nice, sizable winners. But with our focus in the wrong place (i.e. past losses) we get into a habit of taking in that win too early, never allowing that fruit to ripen to its fullest. Think about this- how many times have you blown away a big winner just so that you could lock down “some” profits that would atone for some prior loss? That is the habit to overcome that is the flaw to eradicate.

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