This column was originally published on RealMoney on July 25 at 1:00 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.One of the more difficult psychological hurdles for a trader to overcome is the sense of entitlement that accompanies profitable positions. For example, you might buy 200 shares of a stock at $20 because you believe the fundamentals are compelling; the chart shows the stock just launching from a solid base, and you believe the stock could double over the next year. Six months later, your stock is at $40. That $4,000 investment is now $8,000. You've doubled your money in half that time. At this rate, your $8,000 could become $16,000 if the stock continues its upward climb. So you let your $8,000 run. The outcome of this hypothetical isn't important. Maybe the stock moves to $100 or maybe it falls to $5. Either way, the lesson is the same. You didn't really have $8,000 after six months. You had an initial investment of $4,000 and a paper profit of $4,000. Only if you close out the position are you entitled to keep that money. But as long as the position is still open, you are entitled to nothing except the increasing risk from a stock that has doubled in six months. Somehow, though, it is our tendency to forget about our initial stake and instead simply blend the profit into the original stake and expect more of the same. So what should feel like the end of a very profitable trade instead starts to feel like the beginning of a new trade ... with a very large initial stake. That's a recipe for disaster if the trade goes awry. Here's why. Now that you've got your "double," any pullback will likely trigger this response: "Once the stock moves higher again and I've got my double, then I'll sell." Sound familiar? Worse still, the price continues to fall, and you start feeling bad. Get it? You still have a very profitable trade on your hands, but you feel like a loser. You're kicking yourself for not closing that position. And if you feel like a loser in this profitable position, then how do you feel about the rest of your portfolio? Chances are that all you're seeing are a bunch of lousy trades. You hold a "woulda, coulda, shoulda" pity party for yourself. So how do we avoid this situation? First, establish a price target for each trade. Having a price target does not obligate you to close the trade out when your target is hit, but it certainly should prompt you to tighten up your stops to protect your gains. When you hit your target, you should realize that the price move is now mature. The more mature the price move, the greater the risk of the move ending. Second, trim your position back if it gets too big. Yes, having outsized gains is a good thing. It's a great thing. But sustaining outsized losses is a bad thing that can be easily avoided by managing your position size. Finally, when you have hit your target, give yourself some kind of reward. Perhaps it's dinner at your favorite restaurant; maybe it's a round of golf. By celebrating in some way -- no matter how small -- you are effectively marking the end of the trade and protecting yourself from taking the whole thing for granted. Let's look at some reader picks: Halliburton ( HAL), Chipotle Mexican Grill ( CMG), Illumina ( ILMN), Parlux ( PARL) and AES ( AES).
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Parlux to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.