How to cut losses and letting winners run

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Looks like you may be correct. Keeping the risk per trade a constant by adjusting the position size according to the stop loss shows a cummulative net loss if you close at end of day or stop out.

All these strategies will fail if there's no way of skipping some bad trades.
A profitable system must exploit some inefficiency or market behaviour which can't be found on the chart alone. The chart can only help a trader positioning himself at a better moment.

We've heard it time and time again. And yet, even well-seasoned traders will let this obvious wealth tip go right through their fingers.
"Cut your losses and let your profits run."

For most people, something inside them just keeps them from following either part of this plan.
And this something usually can be narrowed down to their "gambling" self.

Those who take chances by not cutting their losses short are taking a gamble.
They are gambling that the loss they have accumulated so far will soon decrease, bailing them out of a bad spot and possibly providing them with a winner.
They will do this rather than take a sure loss, one that they know the amount up front.

For example: A trader may be in the red by $1000. If the trader were to cut his losses now, he knows exactly what his loss is, $1000.
However, by staying in a losing trade, he is taking a chance that he might recover.
But this also leaves him open for deeper losses of an amount he is not aware of.
That known amount is put aside in favor of possibly making it much worse. Thus, a gamble at best.

The odds of such a losing trade is much larger to get worse than better.
Yet, for that small possibility of improving a bad situation, the trader gambles with mounting odds against him.
Eventually the loss gets to become a size, which forces the trader out. This is how many wipe out their accounts.

There is another side to this. Letting one's profit run. Most traders, especially those who have a series of losses, will jump on the first sign of a profit.
They've done their homework, and ended up in a very good trade.

Now there is some profit in the kettle, they immediately abandon their original expectation of a sustained move in their favor, and cash out.
Here is where they decide not to put on their gambling persona, out of fear they exit early.

For example: A trader may be in the black by $1000. The move has only gone about one-quarter of the way towards the trader's original expectation for the move.
However, fear of losing that $1000 kicks in and the trader cashes out. The problem here is that the odds were now in his favor to continue.
A winning trade has a higher probability of continual success, and should be exploited. But fear usually wins out for those who just can't seem to get ahead.

Letting your losses grow, and having the mentality to allow that, but on the opposite side losing that edge and cutting your profits short is a sure recipe for disaster.
A good trader must learn to watch those profit situations carefully, but run like heck at the first sign of losses.

What makes it difficult to adhere to these common sense principles is the desire we all have to produce a winner.
We want to be right all the time. Who really wants to lose? This inner desire to be right all the time is what hurts even the best of market forecasters.

There exist several market analysts that produce forecasts of outstanding accuracy.
Big players may use the advice of these ones due to their incredible ability to determine market action.
However, many of these analysts themselves may not do as well as those using their work.
Why? Because of the need to be right, the one doing the prediction has his ego tied to his work, which makes it difficult to accept anything that differs from the prediction.
Thus, it becomes very difficult for one to trade that which he publicly predicts.

As a market analyst, I know this problem personally. When I try to trade a publicly made prediction, the results are less than favorable.
However, whenever a trade is done in private, then the results are wonderful.

It almost starts to feel like making a public prediction destroys the opportunity altogether, as if some mysterious individuals are waiting for the prediction,
and then making it a bit more bumpy than expected just for you. That mysterious individual is really our egos.

It's important we remove the need to be right all the time. Take the trade with an open mind, that if it moves in our favor, we will take steps to stay in but safeguard the trade.
If it crosses into an area that we pre-defined as the most loss we are willing to take for that trade that we do so and consider that a winning move.
Because in the long run, if we cut our losses short, and let our profits run, either way, we've won.

Great post seykota...

Phorex Phreak

This is one of the best post I have ever read in last three years on Forex Factory.

I just wanted to add that planning and waiting for a high probability trade setup that has limited risk should be the main focus, because without a sound, rule based entry method, a trader can never judge the exact risk involves in a trade.

good posts in here

the stop loss is really just the price to pay for exposure to possible market movement, the entry fee for a foreign exchange roller coaster ride. as i can never be sure that the trade will go in my direction, all i can do is to get out if it is not. (possible) failure is the price to pay for the opportunity to win.

cutting winners (or fixed take profits) is like throwing roadblocks in your way. on the psychological side, after a losing streak you will be more likely to cut a winner just to get the dopamine kick for being right again, which carves even deeper into the psychological hole. or when the risk is too low and you don't care, you may let the winner turn into a loser because you don't pay attention to a possible change in direction.
on the technical/fundamental side, you could get a signal on h1 which usually is done before the end of day, which now turns out to be a great entry on a daily reversal and runs for a week or two.

so its always a balance act between the different factors which constitute the market at that time and your own perception of it. since every trade is different there is no solution a.k.a. holy grail for how to exit properly, it depends on the circumstances.

So can anybody describe a complete system to follow that will eliminate these habits?

I've read these same things over and over, I have gone through them, yet haven't seen a way of working systematically with them, measure the improvements and finally get rid of them.

seykota- What a stunning post you have written, thankyou for sharing your thoughts.

I was on another thread earlier and i was talking about stoplosses. Traders who dont use stoplosses or exit when things a going wrong will obviously come unstuck at some point as the market will start to move against them and it wont come back to let them get out at BE. any experienced trader knows that they must cut a loss as at some point they will end up in an trade and it will never come back. in time it could eat their whole account.

Therefore the opposite of this (in theory) would give us results, in a sense a profit target is just a cap on profits and it limits the potential of the trade. allowing a profit to run infinatley in our favour is a recepie for success. the reality is some what different and psychology will usually force us out of the position.

And like you say if a trader has 3 or 4 losses in a row they will ready to bail on the first sign of a profit as they have formed the belief that the previous trades have some conection with the new trade they are in. The fact is previous wins and lossers have no bearing on the outcome of the next trade whatsoever.

Another thing i see all the time is traders 'over managing' their positions. This may involve moving to a BE stop far to soon and letting themselves get whipsawed out of good trades. But it 'feels good' to be risk free.

If they were short and the market has fallen they are happy so they move to breakeven. So long as the market keeps falling they remain happy with the trade. But when the market begins to retrace the start to feel unhappy and stressed out. They may even pray to their chart to keep going down. The second they are stopped a breakeven their psychology completely reverses! Now they want the market to go up so that they are proved right about moving to breakeven. And when the market starts to fall this is now a painfull experience! as they are missing out on the profit.

This is obviously an example of a person who does not understand how the market exists. but thats how they feel and i think we've all felt like this at some point. people naturally want to be right. and when their proved wrong it can knock hell out of their confidence if they let it.

I still feel a bit sad if i miss a huge move due to being taken out a breakeven. But what i will not do nowadays is let it affect the next trade or my judgement. i wont go hunting for a setup just to get back in the market or go jumping back into the trade when it is obviously too late. if i felt i was getting my head messed up by things like this its time to take a break for a week or so.

Hi i'm a newbie here. I just wanted to share some of my thoughts on this to see what some of you think.

I use this mind set of cutting losses and letting winners run, not by a set trailing stop, but using TA to move the stop. Its really simple and has obviously been done before, but just wanted to see what you guys thought of it. I enter positions based on 2 bar high breakouts on Daily chart, then move to M15 chart and move stop loss to previous low. Then if price retraces, then makes new highs I move stop to the next low (trend). I continue to do this until I am stoped out. It is certainly effective in terms of R:R, since there is in theory an infinite potential for profit. In reality of course big wins don't come around too often, so I find myself taking lots of small losses to wait for the big win. my average win is twice the average loss, and win% is around 40%. This is from live testing 50 trades so far. This methodology has really helped me on becoming a "risk manager" first before learning to become a "trader", which I believe is important.

I am quite inexperienced and just wanted to see if you guys think entering on 2 bar high/low breakouts is a good enough entry point, or whether I need more entry criteria.

Thanks

looks good, simple is best. As long as it works and meets your expectations, it's a good idea to trade it disciplined and mechanically.