From Craig Cobb at Trade with Precision:
Possibly one of the most famous sayings in trading circles is ‘cut your losses, run your profits.’ To most newbie traders this is often seen as something professional traders do and something they can only aspire to. In my experience, the truth is that this saying is correct if taken in the correct context, however there is a grey area here which I would like to shed some light on.
It is widely known that to cut your losses is a good thing. I agree if this is to mean using a stop to shut a trade when it has gone against me and is no longer a valid position. I disagree if it is taken as saying ‘ïf the trade goes against me I should shut it before my stop is hit to reduce my losses’. The latter is a reaction to the pain caused when a trade goes into the red.
The second part to this old saying - run your profits means that one should let profitable trades run on to become big profits. I agree and disagree with this statement at the same time. Let me explain. You see I do agree that sometimes when the bigger picture lines up and allows for a potentially bigger move that the focus should be on targeting a big profit. The issue with this rationale is that many traders don’t know what a big runner is which tends to lead to “home run fever”. Home run fever occurs when a trader looks for a big move on every single trade. The issue with this is that naturally the odd trade has a big move however these trades come surrounded by lots and lots of losing trades. The net result of this is that many probable trades eventually turn around and become losing trades which over a long period of time sees the trading account fall into the red.
Look I have to be honest, there are many sayings out there about the markets and I will look to cover a few of them when the timing is right. The fact of the matter is that nearly all of these sayings have truth to them. The major problem is that they become a “choose your own adventure” book with the reader deciding what they want to see. Trading can be a challenging endeavour and it certainly can’t be defined by a single saying or phrase. To trade well you need to manage your risk, have a strategy with an edge and flawlessly execute that strategy over and over.
There is one word however that every single successful trader in the world has in common before they find their success and that is being decisive. The path to becoming decisive takes time and can be arduous for some, usually the best way forward is finding someone that has achieved what you want, model them and get support and education. Join the ongoing education offered by CMC Markets should you require some help and guidance on this path.