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).
Looking 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,