This saying is bartered about like some kind of wise words from above - cut your losses and let you winners run.
I think that most of us in the 1KT know about cutting losses - that's the easy bit, hell if we dont then we go broke right? Or do we?
BUT 'let your profits run' is harped on by almost every guru and book writer on the planet - unfortunately they never answer the inevitable question that follows "how far?"
How far is letting a profit run? if you allow a 1 pip trade to go to 2 pips you've let it run. if you let a 10 pip trade go to 500 you've let it run - when exactly is enough?
To give some background to differing opinions before the floodgates of posts follow, please allow me to present some popular opinions and their reasoning behind them.
1. trade it till it's dead - in this scenario you take a trend trade and then stay in the trade until the trend shows it has broken - ie the sequence of higher lows has been broken in an uptrend or the lower highs are broken in a downtrend.
I myself carried an experiment out in 2005 regarding this issue. what i did was produce a spreadsheet with every trade i took in it. for each trade there was what the actual trade made if left till the trend broke and what the result would have been had you taken 10, 20, 30 etc pips on each trade - this went all the way up to 200 pips (i was trading 5 and 15 min charts at the time)
the object of the sheet was to calculate my ideal take profit - so for example if at 70 pips take profit it made more money than at 80 then 70 would be best.
After 150 trades it was time to assess the results and they really suprised me.
what i thought would happen was that as most of my trades did not go father than 50 pips that the ideal take profit would be somewhere between 30 and 50 pips - that taking say 50 would pay for the big runners that i would miss because id get 50 instead of say 20 when the trend had broken.
even though the vast majority of my trades went a maximum of 50 pips ish and they probarbly closed at +20 or less as predicted there were a few trades that went much more even to almost 200 - they were not regular but they had to be factored in.
after 150 trades the results were in - the best take profit, from an account gain perspective was .... no take profit!, just close at the trend end!
This really kind of blew my mind - even though on the majority of my trades i was giving back sometimes 50% or more of the move it still made more money than taking a set value. - the runners paid for the lost retraces and then some. - the differences weren't small either they were large.
The problem with leaving the trades on the table are obvious - psychologically most of the time you feel like you are giving pips back.
2. Take Profits regularly and let the losers run.
This is a dirk de toit kind of standpoint from bird watching in lion country - although letting the losers run forever is not the idea as I will explain.
Basically in this strategy you decide on the underlying trend using fundamentals OR longer term charts (after all they tell you where the trend is not where the fundies say it should be)
you then identify a place on the longer term charts where you will class the trend as broken and that's where all your stops will be - you are going to trade in one direction only.
so you decide the trend is long so you are only going to trade long and your chosen method is to buy dips.
each time you take a trade you look for profits that you are comfortable with, say 40 pips in the case of Mr du-toit. if the dip was not really a dip you leave the trade in because chances are price will come back anyway with the prevailing trend. you buy the next dip again and just leave trade 1 there - trade 2 you again take your 40 pips etc. all with low leverage of course.
you carry on buying these dips and treating each trade as an individual trade taking profit everytime. The losing trades are only closed when the underlying trend is changed by either fundamental means or whatever method you have chosen.
The plus side of this method is that because you are always with the underlying trend you get a lot of winners - even if sometimes you have to wait for them - Dirk claims around 85% and others back up this figure so i have no reason to doubt them.
the downside is that when you do have to close losers because the trend changes they are larger than the winners, often several hundred pips and that is when the drawdowns happen.
the theory is that you have lots of wins and the wins make more than the large losers.
3. Reduction take profits.
The third one to cover is where you close say half the position at specified levels and let the rest run.
Van tharp in his books says this is folly and you would always make more money by leaving the whole position in - and i'm sure that this is true but i can't comment on it as ive never done it.
Discussion:
Although we look at the market scientifically there is also the psychological aspects of trading. Im sure than those who follow Dirk's method of 85% winners feel much better MOST OF THE TIME that do those who trade looking for the big one who only win say 35% of the time.
There are many ways of looking at this and i'm sure all have some relevance, however more than anything, as an active trader and money manager I have to not only rely on cold maths and physics, but also on my emotinal well being.
which is harder - having a w/l of say 35% which produces drawdowns regularly or having an 85% w/l which produces drawdowns much less regularly but when they do they are large and take longer to get out of?
i can tell you that the 35% method produces drawdowns in about2-3 weeks and then they come out of those drawdowns spectacularly fast, like in 2 days or so to new highs.
im guessing that the other method produces them the other way around - a hard drawdown in a day or so that then takes 2-3 weeks to pull out of.
The way I have traditionally traded has been the 35% W/L way and I can now suffer some very hard drawdowns without it bothering me too much as I know how they turn around.
To be good at this I had to mentally condition myself that if i took money off the table before a trade was over that i did a bad thing - even if it made money. I made it hurt when i took 50 pips and the trend went to 200.
what i would really like to know is that those who take money at set pip levels, say 30 pips or whatever, how do you mentally train yourself NOT to kick your ass really hard when those trades go on another few hundred pips or so without you on board?
also interested in other views on taking profits or cutting losers etc but please try and keep the topic fresh and not just saying 'this is what i do' - tell us why and how you control the mental downside to your strategy (every way has a downside)
Source : http://www.forexfactory.com/showthread.php?t=54070
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