Cut your losses and let your winners run

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cut-your-lossesCut your losses and let your winners run” This is one advice that you always heard from many Forex experts or articles. So, as a beginner in day trading, we want to know how actually can we apply this strategy and what are the drawbacks that we may face.

Most of the time we have this experience when our trade moves into profit, we tend to exit fast with a nice profit before anything happens to our gains. Sometimes after we exited the trade and the market reverse, it then confirmed that our decision is a correct one. However, there are times that the market will keep on moving, leaving us frustrated at missing out a much better profit.

Of course, we should not be greedy as explained in the 25 Rules of Trading Discipline. But, it does not mean that we are not aggressive enough to get the most profit out of our trading strategies. We know that the markets do not just give us money. We have to work for it. We have to be constantly improving our trading skill over the market.

Over the past few years, I have been trying to make my winners make as much as they possibly can. And, it is not easy to always stay profitable all the time in the long run as explained below.

You may have a strategy with high success rate. That is, your winning trades are a more than your losing trades. But, then your winners are pretty small as compared to your losers. So, you become desperate and eager in keeping your profitability.

Or you may have a strategy with good reward-to-risk ratio. It means your winning trades make many times more of what you lose. But, then you might have a lot of losses as compared to winners. Again, you might feel worry in how to keep your profitability in the run.

So, you can see that we are spending our lives winning and then giving back all our profits over and over again. How about looking at a different scenario like winning and giving back a portion of that profit over and over again. Can this strategy help us in making more money over the long haul?

Yes, this strategy works if you follow as what it is explained below. This strategy make use of price breakout and then get into trade to profit from it.

Take a look at the chart below, you can see that the price has broke out of the pennant formation at A, we enter a sell trade.

Distance run chart

  • Then, we marked up the support levels (downtrend) or resistance levels (uptrend) on the chart.
  • When the price hit the support level at B, we will close 50% of our trade. This means that we have earned some profit.
  • We then move our stop loss to breakeven and the rest of our trade is risk-free.
  • Once C is hit, we can move our stop level to B as we are targeting for D. Our worst case scenario is closing both halves at B for a profit.
  • Price keep moving and it hits D, we move our stop to C, targeting for profits at E.

We need to understand that this process will not continue forever until the market reverses (this could happen anytime). We are using support/resistance levels which gives us a realistic view of how the market move. And if we decide to take profit at D, so be it.

This strategy works and can help us make more money if we manage it properly. The advantage is that you are in a risk-free trade even if the market reverses and hit your stop level at breakeven.

Try the strategy out and let me know your feedback by leaving a comment below.

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