The myth of letting your winners run

[Tradex]

I swing trade and have held some positions for years

The problem with this long-term approach is the opportunity cost.

Let's say you buy a stock at $10 on January the 2nd and at the end of the year it is up 15%.
So far so good.

But then the next year it goes to $15.10 and stays under that level the whole year.

Sure, you made some extra money (10 cents) but you could have easily made much more money if you had traded another trending stock.

So yes, letting our profits run is a good thing, but up to a certain point. If your average profit per day or week is dropping (like in this example), then it's time to dump the stock (or commodity, currency, etc...) and choose another "horse" to bet on.

In other words don't let the profits run if the price is clearly going nowhere after X days or weeks. Exit the position and find a better trading opportunity.

 

[GotherL]

When it comes to daytrading stocks esp the leading gappers I believe intraday swing trading is the better strat. Short-term daytrading or scalping for small gains most of the time will just have you losing to spreads, battling commissions and making yourself more prone to fear & greed decisions.

 

[Tradex]

Short-term daytrading , scalping for small profits most of the time will just have you losing to spreads

Daytrading is fine if you are still young (not my case anymore) and have a good trading system.

Scalping is a sucker game, the mathematical odds against the trader are overwhelming!

Swing trading on the 1 to 4h charts is perfect.

Long-term trading on the daily ? No way, boring!

 

[deaddog]

The problem with this long-term approach is the opportunity cost.

Let's say you buy a stock at $10 on January the 2nd and at the end of the year it is up 15%.
So far so good.

But then the next year it goes to $15.10 and stays under that level the whole year.

Sure, you made some extra money (10 cents) but you could have easily made much more money if you had traded another trending stock.

True;

However a stock that goes sideways is not trending and will eventually break the trend line.

I usually don't buy stocks that are trending less than 20%

 

[deaddog]

Long-term trading on the daily ? No way, boring!

Depends on how much time you want to spend making a living. I prefer to spend an hour or so a day and then find something exciting to do with the rest of my time.

My idea of exciting is shooting a round of golf in the 70s.

 

[Tradex]

However a stock that goes sideways is not trending and will eventually break the trend line.

Citigroup - a powerful player in the banking industry - lost 98% of its value from it 2007 peak and is still down 85% as we speak, 13 years later.

General Electric, another super big company, topped in 2000 and is still down 80%, 20 years later!

I personally never wait for an hypothetical breakout, I trade markets that are trending NOW, and exit when the trend (party) is over.

 

[Tradex]

Depends on how much time you want to spend making a living

You can swing trade on the 1h charts and spend only 10 minutes a day looking for a trading setup.

 

[volpri]

You going there to buy or to loot ?

wrbtrader

Lol I do my looting in broad daylight. I take from others what I did not work for. The store I loot is called the ES and or MES. Sometimes I will hit the iconic YM or NQ. I work alone in the daylight. Guard your store (your trading account)well....you never know when I will show up.

 

[Flowfollower]

Sincere thanks for all of the replies and arguments for and against letting winners run vs profit targets

The point of this thread is not to say "my way is the best way" BUT to really get 'under the hood' of the the "let your winners run philosophy" - beyond what is written in books. Hopefully we can all benefit through collective thought.

I would like to mention that the core points that I made in my original post have not been not been discussed which was the point of the thread!


(1) the sacrifice of trade frequency by letting trades run in the hope for that say 1 in 10 outlier
(2) the difference between staying on a winning trade or alternatively hopping onto a different position which has begun to move. If the future is never written , then why not hop off at a profit target and jump on another trade?
(3) to capture the outlier requires one to diversify and so have a small position on the biggest % winner. After all, trend followers would agree that we cannot know which will be our largest winner.


Here are examples based on my experience of "letting your winners run" and also a swing trade profit target (2R in our case) on the daily time frame . Each example requires no special edge and are risking the same 1% per trade:

"Let your winners run":


$100k invested in equities
10 positions
10% stop loss ie 1% risk per trade

Trades per year = 10
5 losers = 5R loss
4 small winners = 7.5R gain (yes this is a cherry picked number but it doesn't matter as the outlier defines to expectancy)
1 very large winner = 20R

• Total Gain: is 22.R ie 22.5% which is a very respectable performance during a bull market. I've seen this fluctuate up to 75% during strong bull markets.
  
  
• Trading time: 1 year
  
  
• Portfolio risk = 10% (10 simultaneous positions).

"Profit at 2R":

$100k invested in equities:
5 positions
5% stop loss ie 1% risk per trade


Trades per year = 60 (5 simultaneous trades per month)
5 losers = 5R loss
5 winners = 10R gain

• Total gain = 5R per month = 60R ie 60% per year. I think 2R on a 50% win rate is not a difficult ask (random entries would give 1R at a 50% win rate)
  
  
• Trading time = 1 Year
  
  
• Portfolio Risk = 5% (5 simultaneous positions although if 1 swing entry per week is taken then this can be reduced significantly)

Once again, thoughts appreciated!

 

[Flowfollower]

I don't see the problem of letting winners run. As a trend follower I don't close a position until it breaks the trend.

I swing trade and have held some positions for years. I buy stocks that I hope will go up. If they continue to do so there is no reason to sell.

Is 'letting your winners (ONE WINNER?) ' run an optimal use of capital?