In treasury trading, do some banks and investment houses put a cap on a person’s or unit’s trading income during a year? We of course employ a stop trading limit when accumulated losses from trading reach a certain level. What about the reverse? Could there be a valid reason for it?
I worked with energy traders who were bracketed by stop-loss and take-gain positions.
So if their position lost too much money they were instructed to close it.
And if their position had too much money on the table they were instructed to take the gain on at least some of it.
We had a situation where the spot natural gas market was advancing so fast that our top trader had to follow the rules and liquidate some of his positions. He shrewdly did so at a slow but acceptable place and made a few more million dollars by taking his time.
I forgot to give the reasoning behind the take-gain orders. Stop-loss and take-gain limits were a huge signal that the market was overly volatile and could snap back quickly. The stop-loss is an obvious strategy to insure that there were funds left in the business should the market continue to move in an unfavorable direction.
The stop-gain was to corner any greed the trader might have. They had a tendency to go balls to the walls with the company cash when they were winning. Experience had taught the bosses that taking a good gain was much better than leaving that money in play and risking losing it.