Cut losses fast, and let your winners run (right into your stop-loss).

This concept is repeated as much as any in trading circles.

“Cut your losses early, and let your winners run.”  This comes from statistics that indicate most traders take their profits before they’ve reached their potential, but hold their losers open much longer; presumably with hope it’ll return to profit (or a more reasonable loss).

running-moneyLooking back now, it is this trader’s opinion that this statement is quite the double-edged sword for a trader struggling with a diminishing account, or grow a small one (or a big one for that matter).  The problem is that nowhere in this concept, of cutting your losses and letting winners run, is there any determination of the traders ability to recognize what’s reasonable in terms of taking profit.  I’d wager that a hefty portion of struggling traders who are given this advise, only need the advise in the first place because they’re not accurately determining reasonable and attainable profit targets.

As a retail trader, it is important to remember that there’s nothing to actually “win” in the traditional sense of the word.  The game is never “over”, with winners and losers.  In fact, throw out that concept of winning and losing all together.  There are no winners and losers.  There are those that quit when they were ahead, and those that didn’t.  I hear you, and you’re right.  You’re never going to make any real money trading if you never take more than a pip or two.  However, you’re never going to make any money at all until you stop losing it.  A trade that spends all day at 80 pips profit, just to stop out at -20 because some banker got up on T.V. and shot his mouth off, doesn’t make money.  Not to mention, how the trader feels afterwards, which is infinitely worse than had the trade stopped out at -20 immediately.

I found, that when I quit trying to “win money”, I immediately began to earn it.  If you must employ the concept of “winning”, define a win as anything that is not a loss.  When we realize our income is not satisfying our financial obligations, we often look for ways to save more, rather than earn more.  The reason for this is simple.  It is far easier to spend less than it is to earn more, and the results of spending less can be immediate and lasting.  Earning more, on the other hand, often requires additional investment of time and money, leading to results that may or may not materialize at some arbitrary point in the future, at which time the increase in revenue may or may not translate into a solution to the original problem.

In Episode 149 of The Traders Podcast, I discuss the idea that success (at least my own) in trading has been a “side-effect of not losing money”.  Contrary to what that nagging subconscious tells you when you see it on your charts, taking 7.4 pips of profit at the very beginning of a 200 pip rally doesn’t make you a doofus.  It  makes you a rock star.  Do you know how many traders had their lunch stolen on that same move?

I catch flack for it all the time from other traders, but I can’t even remember the last time I let a trade go to it’s profit target.  It’s even rare for me to let a trade get into the general vicinity of where I think it could go.  If I open my platform, and see a green arrow on the chart, chances are I’m going to close it.  You can laugh with me as I take it to the bank, but I recently closed a trade at 18 pips of profit, that went right through my “target” more than 100 pips further, within minutes of me closing the trade.  I know that’s the exception though, rather than the rule.  More often, if price hits a target that big, it means hours or days of meandering.  I’m not the kind of trader that deals with that well.  I’d gladly pay that 100 pips, for the opportunity to take 18 pips of profit and go fishing.

“Capital preservation” has been written about enough, but not taken seriously enough by many traders.  This, is my job description.  Take trades, don’t lose money.  I no longer have pip-goals for days, weeks or months.  Any time achievement of these goals is called into question, it drastically effects my ability to actually achieve it, and I’m sure this is so for many other traders as well.  The bottom line is that the equity in your account is going to change.  Before you focus on how fast it changes, make sure it’s changing in the right direction.  Start laying bricks.  Harness the power that comes from taking profit.  Follow the advice of cutting off your losses quick, but don’t be afraid of taking fast, easy profit.  Easy is what you want trading to be right?

Take that easy money for one reason.  It’s easy.  10 pips pays the bills, 1000 pips pays for Prozac.  Quit trying to wrestle a living out of the market, and instead be gracious about what it hands you.

I’d love to hear what others have to say on this subject,

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21 thoughts on “Cut losses fast, and let your winners run (right into your stop-loss).

  1. Pete

    Awesome, awesome, awesome! Thank you so much for this, Matt. You just helped take a huge weight off my shoulders.

    Reply
    1. mlacoco54 Post author

      Great to hear! I put more effort into making work easy, than the work itself even requires. My entire life is built around the “easy way”. Do what’s easy, and do it over and over!

      Reply
  2. Alan

    Good post. Always need balance between risk and profit, but my 1st rule is ‘Don’t lose money’. If I think the chance of a trade turning is getting too high I sometimes just tighten the stop right under price. You get stopped out lots but sometimes you get a runner. I’m on holiday os at the moment but had an open trade to deal with. I moved the stop to just above BE. Worst case, I lose nothing, best case, I get home to a little profit.

    Reply
    1. mlacoco54 Post author

      BINGO! There’s nothing I love more than getting a stop to breakeven. Like you say, the worst that can happen is you don’t lose money. Then you get to forget about it and go live life!

      Reply
  3. Matt

    Money is made by playing probabilities and letting your price reach its target or stop, nothing in between. Think about it this way: if your’e a trader at a bank, and you tell your boss u want to open a trade that has a risk of $1million but a profit target of $4million your probably going to get the ok to do the trade if you have around a %40-%50 probability of success. If you close that trade when your up only a $1million you may feel good, but you are going to get fired because you completely violated your reasoning and money management for that trade. I could not disagree more with this post.

    Reply
    1. mlacoco54 Post author

      Excellent! I love hearing all the sides! And you’re definitely right! This is also why I’d never trade anyone’s money but my own.

      If a trader is skilled at determining high probability targets, letting their trades hit them is money in the bank. That trader probably isn’t struggling with long running losing streaks either.

      Taking profit just because it’s profit, regardless of how much, not only keeps my lights on, but provides a reasonably comfortable living for me and my family, and I’m filthy rich with free time and zero stress or anxiety over my trading. I’ve come a long way is we I was a “struggling” trader, but I still use the same approach. 10 pips, at ten lots, is a decent living. Sometimes you get a runner and bank a lot more. A 300 pip week means two months off.

      Sometimes, a struggling trader just needs to see some PnL that doesn’t have a minus sign in front of it, and for some that means getting out whenever you’re “lucky” enough to be on the right side of price, no matter how far.

      One doesn’t need to be good at this to make a living with it, or even fully understand what’s going on. You mentioned the word probability, and you’re about to start hearing a lot on probability from Shonn Campbell (@plateautrader) and myself. As it relates to this post though, closing a trade at even one pip profit, results in 100% probability of making money.

      So, in the end, I love hearing about the “dark side”, but I’ll never switch! It is just too easy to take my money and run.

      Reply
  4. fxoutlier

    Cutting your losses and letting your profits run seems to be quoted by everyone and I never did get it. This is one of the only articles I’ve read that looks inside this trader quote and challenges its meaning. Brilliant stuff. Keep on writing. I always look forwards to you and Shonn writing anything Don’t know why I can’t seem to post comments on Shonn’s site. You need to get together again and record another discussion, but not in a cigar shop please! it was so difficult to listen too.

    Reply
    1. shonncampbell

      Simon! Whats up man. I’m just a lot slower at getting the comments approved than “Matt the Hat”. Always greatly appreciate what you have to say either in comments or on your blog. keep it up friend
      sc

      Reply
  5. Osmin

    Excellent post. I trade the same way, 10 pips profit at a time. My problem is sometimes I get too greedy and I let a winner becomes a loser. For example, If the trades goes to 5 pips in profit, sometimes I let the trade become negative, and I know this is a mistake I am making, any advise how to solve it.

    Reply
    1. mlacoco54 Post author

      Well Osmin, sometimes we just lose money, and that’s the way it goes. What happens after the trade goes negative? Do you stop out? Do you close it? If you’re profit targets are 10 pips, then your stops are probably pretty tight. A tight stop demands a great entry. With that said, I’d examine your entries, and see if you can add some probability to them, weed out the ones that hassle you. With this type of trade, you don’t want to be waiting on it. You want to know if you’re wrong right away. You also want to know right away when you’re right. Ultra-short-term trading for tiny profit targets can be really easy, or it can be really hard. Usually, it goes from easy to hard when you allow the trade to become something else. The minute it’s not Ultra-short-term, the minute it’s got a profit target you’d consider anything but “tiny”, in other words, when you change your plan after the trade is on.

      An easy trade is a fast trade. If I’m shooting for 10 pips, I want price to scream to that target. If the market confuses my “Buy” button with “Pause”, I’ll kill it right then and there. After all, it’s not doing what I want.

      So in the end Osmin, perhaps you’re making a mistake, perhaps you’re not. To me, again, it seems like the entry may be problematic. Perhaps with some adjustment, you’ll filter out the ones that only go 5 pips. Then again, there’s nothing wrong with Break Even, even if it’s 90% of the time, if the rest hit their targets.

      If you’d like to discuss you’re situation more specifically, I’d be happy to offer my thoughts. Tweet me @mattlacoco.

      Reply
  6. vikasrao (@vikasrao)

    Matt, one thing I feel you didnt address is how trades which are losers right from the get go fit into this. Lets say I win 50% of the time and take a full stop out, I need to atleast make that much back on the other 50% of the trades. What you post makes sense in theory, but in practice, its unlikely to play out. One will however improve their system’s win rate by doing this, but fail to make any consistent money in the long run IMHO. “Pros go broke taking profits quickly”.

    Reply
    1. mlacoco54 Post author

      Vikasrao, you make a great point! Indeed, if you’re winning 50% of your trades, you’re going to need to make twice as much as you lose to break even, and that’s, well, that’s hard.

      Thankfully, this is not something I deal with. Trades that are “losers right from the get go”, get closed right from the get go. Better yet, don’t take them in the first place. Taking only high-probability trades allows the trader to know when they’re wrong fairly quickly. To me, any approach to trading that yields a 50% success rate is better suited for automation. With a win rate this low, strict rules are required, and must be followed every time, without fail in order to be profitable. A robot is much better at doing that than I am, and this goes for most other people as well.

      The essence of this post is a state of being. It’s not about getting rich on 3 pip trades. It’s not about never letting a trade find hundreds of pips. It’s about accepting what is being offered, rather than dictating to the universe what it owes you.

      More on this in a new post later today.

      Reply
  7. Pingback: I’m a genius, an idiot, and neither one. | Matt's Awesome Trading Blog

  8. Yogi Keung

    Most excellent post!
    All you articulated also applies to “risk reward ratio”, R&R ratios can do more harm than good, especially true to a beginner trader!! How the gurus define their reward is beyond me, “risk” yes, but reward IMHO is impossible. Love to hear your thoughts on this one.

    Reply
  9. Michael

    I truly believe that you must conserve your capital however, let your profits run when you have the opportunity. I know that many do not believe in moving averages because they are lagging indicators but I use them to keep me in a winning trade for as long as it allows me. This allows me to keep my emotions out of it and let the market tell me when time is up…if I move to plus one as soon as possible and stick with my plan it works out in the long run….great post and discussion …..

    Reply
  10. Serge Krieger

    Cutting losers and letting winners run is simple truth. Another one, does not let one’s profit turn into loser. I have fixed amount of ticks once I am in profit I move stop to BE at once and let the trade run until the close and that it is. Many many BE trades. some losers and some winners. But,… those very large winners when market moves till the end of the day do make a huge difference and after testing were I to take profit when I am moving stop to BE I would make far less. The most important is to be consistent at everything. Execution, trade management, time of trading cutting losers and taking winners. all must be consistent hence it is easy to test and trade. i only take one trade a day.

    Reply
  11. bradleyfried

    I structure my trades with multiple profit targets so that I can scale out of them, eliminating risk and securing profit as the trade progresses. I also use several indicators which have proved to be very reliable tools for deciding when a trade is over and taking profit before planned profit targets. I think it is always important to build a mechanism for profit extension into your trading system and rules, while at the same time strictly controlling risk and locking in some profit at more conservative targets. The key is to strike a balance between not allowing a winning trade to become a loser, while at the same time not leaving profit on the table by panicking and getting out too soon. The long term profitability of your trading depends on making the gearing of your average win size vs average loss size work for you, not against you.

    Reply

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