Referring back to our list of motivating factors above, we begin to see the importance of a trader’s time horizon. This is expressed in terms of the trader’s age. Consider too that your rate of return is a function of how much time it takes you to generate a given level of profit.
After all, if you discovered a moderately risky opportunity that could net you a small, but tidy profit in a matter of hours, you might conclude that it was a risk worth taking. If, on the other hand, you identified a moderately risky opportunity that could net you a small profit, but leave you exposed in that position for weeks, or even months, it’s almost certain that it wouldn’t look nearly as attractive.
Given that you’ve got a limited pool of resources to work with, and that once you start trading, you’ll find no shortage of potential opportunities, you’ve got to weigh each decision carefully.
Ultimately, what we’re talking about here is opportunity cost.
If you commit resources to a trade that ties up a significant portion of your working capital for extended periods, what other opportunities will you be forced to take a pass on, simply because you lack the resources to take advantage of them?
If, for instance, you decide you’re most interested in trading opportunities that will (potentially) earn you a 30% return in ten weeks, what’s your response when you identify an opportunity with a similar risk profile that could (again, potentially) net you a 25% return in six weeks? Do you take it? Do you pass?
If you deviate from the basic time horizon and potential return thresholds you’ve established for yourself in this instance, will you also deviate from the plan and take profits earlier than anticipated? Will you then also start allowing losses to run longer and have more leeway?
As you can see, this goes back to the notion of making a plan and being able to stick to it, even as conditions change around you. These are the kinds of sometimes agonizing decisions traders are confronted with every single day, so these are the kinds of things you need to be mentally prepared for.
A key point here: You don’t ever want to find yourself in the position of having to make these kinds of decisions after you’ve opened a position! These are the details you need to have worked out in your mind before you even make an investment decision.
Going back to the early profit taking question above, truly there is only one valid answer to that question. A case can be made for taking profits earlier in the time horizon than anticipated if, and only if the profits you’re taking have exceeded your target.
A rule like that would serve you well because it would ensure that you “lock in” profits at a sufficient level to cover losing trades and still have something left over. Then, you can reassess the situation and decide whether the right call is to re-enter the position, or to preserve those resources for some other opportunity with a similar risk profile.