The myth of letting your winners run

[unconventional wisdom]

I'm also struggling with the 'letting winners run' philosophy.

In February, I was fortunate enough to sell several large positions and buy a few put-options. I was buying hand-over-first in March-April. The question now is, what to do with the winners? As an example, I bought V at $150 (imo, an amazing entry) and it's now close to $200. I really don't want to sell it, but at the same time it's hard to imagine another significant move to the upside.

I'm closing a few winners at the moment (mainly tech, MRVL, AMZN (crazy, right?) and moving into sectors that didn't see much of a rebound - primarily banks (JPM, RBS, HSBC, TD). The big risk here is that I'm selling winners to buy losers.

My prediction is that value will rally in the next time-frame at which point I'll sell the banks and buy back my winners (tech) which will hopefully have not increased too far. Worst case, I'm left holding banks with a decent yield (once dividends are reinstated).

 

[Handle123]

For me trading very long term stocks and commodities is based on when it will happen, winning percentages always been 5 to 15 percent a year, hedging is a must, learning risk increases chance of last trade being monster ratios of reward to risk and trailing stops cut off your profits long term.

Scalping is not going for large profits, going for cents or ticks. Reward is often no better than risk so bottom line have to have losing percentages under 5% to do well enough considering overall risk is greatest for me.

Swinging weekly options again has to have strict targets as closer to expiration, movements can get more wild.

Losing percentages come first now in building trading ideas for what I trade as opposed the first 32 years of trading for positive outcomes. Learn to risk far less, hedged if possible allows larger positions put on.

 

[heispark]

People also say no one went broke taking a profit.....

 

[Scataphagos]

I know this post may come across as blasphemy, but is 'letting your winners run' one of the most deceptive commandments in trading? I say commandment as it seems to be preached as gospel. But is it what it seems?

When we let trades run, it is countered by a drop in win rate. We hope for outliers to keep a positive expectancy.
But we sacrifice important trade frequency.

Let's say I'm putting together a swing trading strategy and I believe it has a 50% win rate if I keep profit targets at 2R reward to risk multiple. Certainly a realistic expectation.

This might not sound special but it would allows me to turnover my account in a shorter time and with fewer positions, so minimal portfolio heat.

Why is 'letting your winners run with a trailing stop' any different to using a short term profit target (eg 2R) and then entering another trade which is moving?

I have come to the conclusion one should trade a robotic statistical mindset above all and should really question trading mantras.

Enter trade.
Enter stop loss.
Enter take profit order.
Aim is to have resolution to trade (win or loss) in as short a time as possible. This allows next trade to be entered as soon as possible.
Repeat.
Repeat.
Repeat.
Trading becomes a matter of just entering orders.
Trading becomes boring.

That is all.

Thoughts appreciated

1. I disdain targets* (arbitrary, you know like your "option doubling"?)... recommend traders not use them. "Let your profits run"? Yes, if you can. Not easy. Trades should be more on the "swing" side rather than the "scalp" side. The market will give you every opportunity to turn a potentially large gain into a small one. The key to having a chance for letting profits run is better trade selection/entry.

2. Trades should be "around support and resistance" with tight stops.

3. The "trading game" is not won by making lots of trades... it's by making GOOD trades... and of course we all strive to "make LOTS of GOOD trades".

* Unless the "target" is a clear support/resistance area on the chart

 

[wrbtrader]

Too much mental capacity though needed and no guarantees of results i find it easier to apply the same rule accross the board this way you wont get the worse or the best

Its like picking up girls at the bar, you either go direct and ask for a number and out of 10 u might get 1 or you talk at legnth with each one, except that if you mix the two you might get the worse of both systems, or thought principle,

It's not too much mental capacity. We should know what we're trading, know if the price action is in a trend, range, chop or whatever within the market context of the day.

If the above is "too much mental capacity"...that's a person that should not be trading.

wrbtrader

 

[taowave]

The very simple answer to your question is backtest your "beliefs",walk it forward and you should be on your path.The answers will be in black and white.Easy,is it not???

I can only speak for myself,but if the method of trading that stands out is not in my DNA,I have a bear of a time sticking to the golden rules..

For me,it's letting profits run,or holding option positions fill expiration..

From extensive backtesting,I have found that all these sacred trading mantras don't hold water..

Far more important,is trading in a comfort zone and never ever doing anything dumb..Risk control is paramount,and I am pretty dam sure after making every mistake known to man,I have covered the bases..

So the short answer to your question is bscktest,optimize the shit out of your curiosity,and then perform WFA..Thats the easy part..

But IMHO,if you do not follow a path that can co exist with your emotional makeup,it's all for naught..

 

[lindq]

I know this post may come across as blasphemy, but is 'letting your winners run' one of the most deceptive commandments in trading? I say commandment as it seems to be preached as gospel. But is it what it seems?

When we let trades run, it is countered by a drop in win rate. We hope for outliers to keep a positive expectancy.
But we sacrifice important trade frequency.

Let's say I'm putting together a swing trading strategy and I believe it has a 50% win rate if I keep profit targets at 2R reward to risk multiple. Certainly a realistic expectation.

This might not sound special but it would allows me to turnover my account in a shorter time and with fewer positions, so minimal portfolio heat.

Why is 'letting your winners run with a trailing stop' any different to using a short term profit target (eg 2R) and then entering another trade which is moving?

I have come to the conclusion one should trade a robotic statistical mindset above all and should really question trading mantras.

Enter trade.
Enter stop loss.
Enter take profit order.
Aim is to have resolution to trade (win or loss) in as short a time as possible. This allows next trade to be entered as soon as possible.
Repeat.
Repeat.
Repeat.
Trading becomes a matter of just entering orders.
Trading becomes boring.

Thoughts appreciated

It's one of the best guidelines in trading, because it's designed to keep traders from exiting trades early because of momentary fear or greed.

The rule is not time specific. It can apply just as well to a scalper, as to a trader watching monthly charts, long or short.

It's simply telling you that if you've established a profit objective, you should stay on that path unless you have a very good reason to deviate. And if you haven't designed a reasonable and TESTED profit objective or exit point, then you shouldn't be in the trade in the first place.

 

[Scataphagos]

So... How is it exactly that you "try" to let profits run? After all, you need to give the market some "breathing room" to contain counters and not get sucked out of the trade too soon.

One tool is the "Regression Channel"... included in many charting programs.

Whether the market/issue is bullish or bearish (or even sideways), nearly all of its action will be contained by its current channel. When price breaks out of the channel, you know the trend has changed... at least temporarily.

 

[smallfil]

First you have to define your strategy, day trading, swing trading, trend following. Each one has a different way to exit your position. You are the ultimate fool if you believe, a one size fits all will work. I guarantee you it will not. There is no perfect solution. Stocks do run and at the least expected time you expect it. That is why you should be ready and in position to take advantage when it happens. One more reason risk management is so important to trading yet, ignored by 95% of traders. If you control your risk, the profits will take care of itself.

 

[taowave]

Well said...I can not understand why anyone would choose to walk into the "Octagon" without having sparred first...

It's one of the best guidelines in trading, because it's designed to keep traders from exiting trades early because of momentary fear or greed.

The rule is not time specific. It can apply just as well to a scalper, as to a trader watching monthly charts, long or short.

It's simply telling you that if you've established a profit objective, you should stay on that path unless you have a very good reason to deviate. And if you haven't designed a reasonable and TESTED profit objective or exit point, then you shouldn't be in the trade in the first place.