When the Market Exceeds Your Expectations

I don't know what anybody expected from the stock market this year, but if you're sitting on large open gains like I am, here's a question worth asking: should we be looking for the exit simply because we didn't expect to make so much money so fast?

This might be the hardest thing we do as traders—sitting on our hands when the market is doing the heavy lifting.

When things are going well, it's natural for traders to ask: Is this as good as it gets? Should I be taking profits now before they disappear?

This brings to mind that old phrase: "You can never go broke taking profits."

I'm pretty sure that phrase was invented by a stock or commodities broker who was in the business of encouraging active trading to drive insane commission charges. It sounds wise, but it's terrible advice disguised as prudence.

Sure, you might not go broke taking profits. But you might miss out on the opportunity of a lifetime. Or at least the trade that could make your month or your year—all because you were too afraid to let your current gains potentially evaporate.

Here's what I've learned after nearly three decades in these markets: the biggest winners rarely feel comfortable to hold. They make you nervous. They make you question whether you deserve this kind of success. They whisper that you should lock it in before the market takes it away.

But sometimes the best thing to do is absolutely nothing.

Just breathe.

Let the market do what it's going to do. If you built your position with proper risk management, if you have stops in place to protect against disaster, if your thesis is still intact—then why are you in such a hurry to exit?

The market doesn't care about your expectations. It doesn't care that you thought a 50% gain would be great and now you're sitting on 150%. It's going to move based on supply and demand, fundamentals and technicals, fear and greed.

Your job isn't to predict when the party ends. Your job is to stay disciplined, manage risk appropriately, and give your winners enough room to become truly meaningful.

Yes, some of those gains will give back. That's the game. But the ones that don't—the ones you let run because you had the courage to exceed your own expectations—those are the trades you'll remember for years.

Sometimes doing nothing is doing everything right.

Sean McLaughlin | Chief Options Strategist, All Star Charts