A very common mistake by investors new and old is the tendency to celebrate profits before they are realized. This recipe for disaster can be a very difficult lesson to learn but once this additional piece of discipline is set into place traders can thrive to new heights. Removing emotion is critical to successful investing.
Avoid premature celebration with unrealized profits, it brings emotions into the game and should be avoided completely.
By signing into a broker account the portfolio summary page can be viewed which reflects the most recent prices of any currently held position. Any profits in these positions are known as unrealized profits because they are not yet permanent (ie the position has not been completely liquidated).
These unrealized profits can be a new investor’s or even skilled investor’s worst nightmare because the psychological effects are immediate. The investor feels great because they are winning, and it can alter what would be disciplined strategy with the stock. “I am up 20% now, just 5% more and I will sell” or “That was only four days, if I hold one more day I will be even better off” are all recipes for defeat long term.
Remember to always sell for a profit, then celebrate.
The arguably toughest part about stock trading is not when buying, but when selling. It is critical for investors to have the understanding that profits cannot be enjoyed until they are actually realized.
Only after the position has been 100% liquidated by placing a stock trade to sell completely do unrealized gains turn into realized profits. It is only at this time when traders have completed the sale that they should celebrate and give themselves a pat on the back for a winner. From there the trade should be analyzed for mistakes and new rules should be made for next time around. Rinse and repeat.