Trading Mistakes to Avoid – Premature Profiteering

One of the biggest mistakes traders make is taking profits to early. Now you might be smirking and waving your hand as you read this because we’ve all heard the saying, “You can’t go broke by taking a profit.” I hate to break it to you, but you can most definitely go broke taking profits if you take them faster than you take your loses.

For example, if you take your profits when you hit a 10% gain and hold your losers until you’re down 20%, you don’t need advanced math to know that you’ll be out of business pretty soon. It reminds me of the joke about the owner of the suit factory who tells you that he loses $10 on every suit, but makes it up on the volume!

Of course, if you make sure to cut your losses more quickly than your winners, then you will make a profit. But you’re profits are going to be a fraction of what they could be, and you’ll need a super high win rate to make decent money from lots of small profits. Depending on your personal objectives, that might work well. For the overwhelming majority of traders, it doesn’t.

There’s another famous saying, “Don’t trade your P&L.” What that means is that you should take your trade entries and exits based on your analysis, be it technical or fundamental, and not based on your profit and loss statement. In other words, if you’ve decided that you believe XYZ is breaking over resistance and heading 20 points higher to the next resistance level, you should let that plan play out (with a stop in place in case you’re wrong). If you watch your P&L, you might get thrown off by your profits and start worrying about giving it back and, next thing you know, you’re out of the position with a 5 point gain and watching, and kicking yourself, as you then watch your trade plan play out exactly as you figured.

Not trading your P&L is going to help you avoid the mistake of taking profits too early, but there will be times when you simply won’t be able to help it, and when taking profits might even be the smartest path to take. The most blatant scenario that comes to mind is when you’re trading very short term options contracts, particularly weeklies or same day expirations. When you’re trading these rapidly expiring instruments, you are battling forces beyond price action, such as time decay and implied volatility, that can quickly crush your contracts even if the price remains stable.

For example, say you buy NVDA 135 strike weekly call options on Monday that expire on Friday. The stock is currently trading at 130 and you think it will hit major resistance at 135. Ideally you’d want NVDA to get close to 135 before selling your calls. On Wednesday some positive news comes out and NVDA jumps to 133. Your calls options rise along with the stock and get an extra premium boost because of the spike in IV on the news. At this point you glance at your P&L and see a beefy green profit number on your calls. While the chart is telling you to continue holding, you need to take into account that since you only have 2 more days until expiration, your calls going to start deteriorating faster and there’s a good chance that the IV pump you got off of the news will disappear too, which in turn will most likely cause your calls to lose some value. So even though the chart is telling you to hold, your hefty green profit is telling you to cash in asap. Could your original thesis play out by Friday and give you an even bigger profit? Absolutely. But the risk reward on the trade no longer favors you holding it and risking a portion, or all, of your profits.

There might also be times when you catch a quick move and suddenly find yourself sitting on a hefty profit and, despite the fact that the chart is telling you to stay in, you simply can’t ignore that stack of cash waiting to be claimed. It’s OK to take the money and run. You might very well be kicking yourself later, when the stock continues higher, but at the moment, you probably won’t be able to keep your emotions in check if you don’t take profits. You might mitigate your risk, and emotional stability, by taking only partial profits and letting some ride. Of course, had you not looked at your P&L at all, you would be able to remain in the trade and possibly emerge with a much larger gain.

Bottom Line

Cutting your profits short can crush your trading account over time, even if it feels good in the moment. The key is to trade with a clear plan and trust it. Yes, there are situations where locking in gains early makes sense, but for most trades, you need to let the setup play out. Don’t sabotage your potential by reacting emotionally to your P&L. Stick to the strategy you designed when your head was clear. Remember, trading isn’t about how often you win—it’s about making your wins count more than your losses. That saying, “You can’t go broke by taking a profit” doesn’t apply to most traders who end up holding losers far longer than winners. If you cut your profits too soon, you absolutely can go broke in the long run.