Let's direct our attention to perhaps the most difficult rule that exists on my trading rules page:
Exits – the only acceptable exit is either being stopped out of a position or reaching a target price which has a clear technical rationale, and even in cases of the latter, partial exits are preferable to outright closes.
I have been following this rule very well…………in my IRA portfolio. But not in my big family account. And that has been really stupid, and I was pondering the difference.
I've figured it out.
My IRA portfolio has moved from $42,000 to $386,000 in the span of 15 months. The incredible irony of this is that (a) there is no margin available (b) no shorting is permitted (c) the commissions are about 300% higher than is reasonable. But it is, far and away, my best performer.
But in my mind, I think I "allow" myself a lot more latitude with this account (let me apologize in advance for the gratuitous use of quotation marks in this post; I cringe whenever I see quotations used for emphasis, but in this case, I am using them for irony's sake, or at least to emphasize a point).
In other words, because virtually the entire account is based on profits, my brain allows me to play a little more fast-and-loose with these positions and let the profits run. I allow myself, in a word, to be "foolish" with this account.
How about my big account, though? That's quite another matter. Although it's built largely of profit, the percentage gain isn't nearly as big, so I tend to be a lot more "conservative" with it. Take this morning, for example – – I had a six-figure position on the XME. I quickly talked myself into getting out of the position. The little voice in my head said something like this:
These profits could evaporate at any moment. The safest thing to do is to take the profits now, wait for a pullback, and then re-enter this position. I can have my cake and eat it too! I will enjoy these profits by banking them, and I will be that much more ready to re-enter the same sized position at a better price. Yay, me!
Well, you know what happened. XME didn't pull back. In fact, it closed at its high of the day. So I wound up going back into the same trade at a higher price, which of course increases my risk.
Do you see the difference? In one account, I "foolishly" left the positions alone, leaving my profits completely at risk (at least inasmuch as they are above any given stop price), and that was the right thing to do. In the other account, I "shrewdly" banked my profits, and that was a complete screw-up. The foolish thing to do was, in fact, the right thing to do.
So what's wrong with the brain under this luxurious head of hair? What's wrong is that I'm not treating dollars as equals. I am somehow trying to protect and shepherd the dollars in my big family account in a way which is deleterious to my trading, and I am allowing the dollars in my IRA (which aren't as "real" since they are the product of outsized profits) to be more at-risk, and I am obeying the rules that God himself handed to me on that fateful day while I was sitting in the roof of my house.
Learn from this. I'll try to learn right alongside you.
