Managing Your Losses Or Winners?...

I have been net negative during my 6 year trading career. I can tell you that the reason why I am overall down is because I book many small profits and let a couple of big losses run. Usually those big losses take out 30% of my capital before I finally capitulate.

Now I set a hard stop as soon as I get into a position. I use a trailing stop if I'm in the money so that I can let my profits run. So far, I like the results. I'm making money.

Before, I had about 75% winning trades. Now I have about 45% winning trades. But the difference is that the winners are a lot bigger than the losers so I'm making money overall.

DNAJ65000

 

So what you are saying is that you should only get into profitable trades and not to get into loosers.

Shucks man, that's my problem!!!!!!!
I mean, when someone explained to me that I should buy low and sell high I thought that that was the secret!!!

but this, this is just revolutionary.

(also, be shhhh about it - don't let the secret out!.)

 

You can take your profit whenever you wish. YOU CAN NOT MAKE MORE MONEY THAN YOUR ABILITIES AND EXPERIENCE ALLOWS YOU AT ANY GIVEN TIME NO MATTER WHAT YOU DO AND HOW YOU CHANGE YOUR TRADING STYLE. The only thing you could do is to trade in a way that makes you feel comfortable. If you feel you gotta take your profit - take it, this will increase your win/loss ratio, but you your profits will be smaller relative to your losses.

As Steve above said the key is optimization, I would add self-optimization - to develop a trading style that will make you feel good about what you are doing. If it shows you losses, this doesn't mean that the method doesn't work, but that you feel it doesn't work. If you keep making losses, but you feel OK and confident, just keep doing it. You may go broke a couple of times but after that to make a real killing!

What I am trying to say is that the method (or system), as long as it is sound and based upon some trading principles, is totally irrelevant to the amount of money you can extract from the market in the long run... What really matters is your mental performance - do you like your equity curve or not, that is the question! For example Fast_Trader said he wants to "hear the cash register ring over and over; all day long" - if he can do that and feels good about it, then he is a successful trader. If you go broke and feel good about it - then you are a successful trader. Just stick to your principles. Not sticking to your principles - that's what makes you a losing trader...

 

I agree with the first statement and am not quite sure about the second one.

Let me explain the part about cutting losses first: There is a difference between realizing when a trade has to be terminated as a loss and just putting a live stop order out to the exchange. This difference can be the difference between a winning and a losing strategy. Sometimes the market sort of trickles and gyrates away from you. In this case it is much better to decide you have to cut your loss BUT wait for a good opportunity to do so. In other cases of course, and it depends on your trading style how frequently these occur, the market just takes off like a rocket, and in those cases you have to act the second you realize you are wrong. In these cases a hard stop could save you several points.

Now about the winners: I believe this one depends very much on your time horizon. I would guess the rule "cut your losses short and let your winners run" comes from the world of investing or futures swing-trading. In both cases there are very long and pronounced trends, which makes the rule work. However, the more you get into exploiting volatility, i.e. the shorter your time horizon becomes, the less useful the rule telling you to stay in a winning position while terminating a losing one becomes. Imagine a scalper never taking a profit, because he has to let the winner run, and always getting out at the market as soon as the position ticks against him. Somehow I don't think he would last long.

Another way to put this is, as a long term-investor your "edge" is that stocks always keep going up, except the ones that become worthless. While this statement might seem trivial and while it is of course not entirely true, it is the basis for the strategy to ride winners and cut losers. On the other hand, if you take a position because you identify a short-term imbalance or inefficiency, chances are it will be corrected sooner rather than later. For the short-term trader, the rule would better be replaced by "get in when you see a reason and get out when the reason disappears, regardless of profit/loss."

 

Just because I have a feeling that some people here might have a hard time with my above post, let me give you an example:

If you buy just above major support, your reason for buying is that you expect a bounce as soon as everyone realizes there is support / large size on that level. As soon as the bounce occurs, you should get out, because you have no idea what will happen next. Your original reason for entering the trade is now gone. Likewise, if the price breaks through your support level, you should get out quickly. This is a case where a hard stop will save you quite a bit in some markets. Again, the reason why you originally entered is gone. (Indeed you may now see a reason to enter short.)

 

On the other hand, your "reason" for entering the trade may be short-sighted. If one expects no more than a bounce, then, yes, he would be justified in exiting immediately. But if that bounce leads to a multi-point move, then one has cut his profits short. If one is buying reversals/"bounces", his results can be improved dramatically simply by placing a stop at the point of exit rather than actually exiting. Nothing to lose, everything to gain.