Conventional wisdom is that no trader should take profits too early. To close a position while there is every chance that the asset in question has yet more profit to come, is to commit the classic error of “leaving money on the table”, a terrible mistake and a sure sign of a rank amateur.
It is like a television game-show guest who collects the first available winnings, however small, and heads home, or someone in a casino, who having won a few coins on a slot machine, shuns the big money available at blackjack or roulette, and cashes in their winnings.
Why are these people trading in the first place? They would surely be happier putting their money in a dull but safe savings account.
Professionals get out early
But is taking profits early an act of stupidity? The worst of all possible position trading strategies? Or does it in fact show wisdom?
Before examining the merits of running profits against the case for taking them, it may be worth looking at some basic facts concerning the market for securities of all types.
Asked who owns , bonds, and , most people would probably say big institutions such as banks, insurance companies, pension funds and so on. Now, it is true that these grand entities are temporary owners of financial assets. But the ultimate owners of all such assets are either individuals or trusts.
That’s right – all such assets.
This is of much more than academic interest. Why is it that the ultimate owners of financial assets in general seem to derive less benefit from them than professional traders working for the aforementioned institutions?
Experience and expertise play their part, and a key aspect of a trader’s skill is taking profits at the right time. By locking in the profits from an upswing, traders can sell the asset on to the investment managers (either working for their own or outside institutions) that look after retail investors.
The asset may or may not be over-priced and due a correction. Even if not, the professional traders – not those ultimate owners, the retail investors - are likely to have captured most of the gain on the price at which they bought.
Put another way, there is little joy to be had from being the “ultimate” owner of an orange if most of the juice has been sucked out by the time it reaches you.