Trading Mistakes to Avoid – Not Taking Profits

In the last chapter we spoke about how taking profits too early can be an account killer over time. The flip side of that can also be true. Holding on to winning trades a bit too long in certain circumstances can end up turning a nice profit into a painful loss. It really depends on the market conditions and type of instrument you’re trading.

High-Volatility Markets

Volatile markets or individual tickers are like wild roller coasters. Price swings are huge and come fast, often reversing before you even have a chance to react. The strong move that you caught in your favor can flip on you in an instant, turning a green trade into a painful red mess. In this type of market, you’ve got to stay tactical and defend profits against potential market sucker punches. You can use tighter stops to protect your gains, if that makes sense based on the chart and your profit cushion. Alternatively, you can scale out of your position or jump locking in your profit and get a good nights sleep. In high-volatility environments, a “bird in the hand” mindset could be the difference between a sea of green and an ocean of red.

For example, let’s say you’re trading a highly volatile stock like Tesla (TSLA) during an earnings week. The stock gaps up at the open and starts climbing sharply from $200 to $220 in just 15 minutes. You’re riding the wave, feeling good, and the trade is deep in the green.

But here’s the kicker: in a volatile market, what goes up quickly can just as quickly come crashing down. Without warning, a negative headline hits the newswire, or traders start taking profits en masse. In the blink of an eye, TSLA reverses, dropping back to $210, then $205, and within minutes, it’s below your entry at $198. What was once a $20-per-share unrealized gain is now a painful $2-per-share loss.

In this scenario, a tactical approach could have saved you:

Tighter Stop: Let’s say you set a trailing stop $5 below the current price as it climbed. When TSLA hit $220, your stop adjusted to $215. As the reversal began, you got stopped out at $215, locking in $15 per share of profit instead of riding the trade all the way down.

Scaling Out: As TSLA hit $215, you could have sold half your position to lock in some gains while letting the rest run. Even if the reversal wiped out the rest, you’d still walk away with a decent profit.

Exiting Entirely: If you sensed the move was running out of steam (e.g., lower volume or resistance at $220), you could’ve closed the trade and taken your $20-per-share profit. A good night’s sleep beats staying up worrying about a volatile market any day.

The key takeaway? In volatile markets, don’t get greedy. Protect your profits and stay nimble. It’s not about catching the top of the move; it’s about walking away with gains before the market slams the door in your face.

Trending Markets

Calm, trending markets or tickers are the exact opposite. The price moves steadily in one direction, with minimal drama or pullbacks. This is where you can relax (a bit) and give your trades more breathing room. Staying in the game longer lets you capture the full ride, boosting your overall risk-reward ratio.

The tricky part? Not messing it up by overthinking. If the market structure is still intact—higher highs and higher lows in an uptrend, for example—resist the urge to micromanage. Let the trade work for you. In this case, patience is the best trade management tool you’ve got.

Just remember, regardless of how calm and steady you think a market is, there can always be totally unexpected event that can blindside and destroy you, if you leave yourself unprotected. It could be a news story about a potential war outbreak or a hedge fund blowing up and dumping it’s entire inventory that can cause the market to dive quicker than a hawk swooping down on an unexacting squirrel (guess who you are?), leaving you watching your green positions turn deep red. That’s why you should always use stops or lock in some profits to avoid a Black Swan event driven disaster.

Trading Instruments

When you’re trading stocks, particular ones with decent volume and tight spreads, you can get out of positions relatively quickly and easily. That gives you more leeway to hold profits longer, because if need be, you can get out without too much damage to your green. You still are at risk for getting hit by a Black Swan event, but the risk of that happening is still small versus your potential to continue profiting based on your original trade plan. Also, placing stops is relatively straightforward with stocks, since you’re dealing with price action alone. Options is a different ballgame.

When you’re trading options, the dynamics of profit-taking change significantly. Options prices aren’t driven solely by the underlying stock’s price movement; they’re also influenced by factors like time decay (theta), implied volatility (IV), and the option’s delta. These variables can work for or against you, sometimes in unexpected ways. Trading weekly options close to expiration takes the volatility game to an entirely different level. While the potential for quick, explosive gains is tempting, the risks are just as intense—if not more so.

For example, let’s say you’re holding a call option on a stock that’s trending upward. Even if the stock keeps climbing, the option’s value might stall—or even decline—because implied volatility drops or the option gets closer to expiration. In this case, holding for too long can cost you big time, as time decay chips away at your premium every day.

As expiration approaches, time decay (theta) accelerates rapidly, eroding the option’s value hour by hour. This creates a double-edged sword: on one hand, a sharp move in your favor can skyrocket the premium, but on the other, any hesitation or sideways action can obliterate the value just as quickly. The closer you are to expiration, the less time you have for the stock to make the necessary move to generate profits. A few hours of sideways price action can cause your option’s value to evaporate, even in a volatile market.

For example, imagine you’re holding a call option expiring in two days. The underlying stock moves slightly in your favor, but not enough to offset the time decay and shrinking implied volatility as the market calms down. Even with the stock moving the “right way,” your option’s value might drop, leaving you scratching your head and staring at a red P&L.

On the flip side, in a volatile market, IV can spike, causing your option’s value to increase significantly. But the same volatility that boosts the option’s premium can also lead to massive swings, wiping out gains if the underlying stock makes a sharp, unexpected reversal. If you’re holding weekly options into or after such events, you might see your premium nosedive, regardless of the stock’s direction.

When you’re trading shorter dated options contracts, especially weeklies, you need to consider taking profits quicker than you normally might when trading stocks or long term contracts. Sure, you might get out too early and miss out on some profit, but the risk reward starts turning against you quickly in short term contracts and a quick drop can wipe you out completely. Even sideways action can eat into your profits.

Bottom Line

Taking profits is one of the most nuanced aspects of trading. It requires balancing the fear of losing what you’ve gained with the greed that tempts you to hold out for more. Managing this balance takes practice, experience, and self-awareness.

Your goal shouldn’t be to time the market perfectly and take profits at the tippy top. While that’s awesome, and might occasionally happen, your greed will probably end up working against you and could cause you to lose what you’ve worked so hard to make.

Your goal should be to manage your risk reward and protect your profits at all cost so that you don’t turn a green trade into a red one. Because in the end, it’s not about how much you could have made—it’s about how much you actually walk away with.