Cut and Run or Let Them Run?

“Cut your losses short and let your profits run.” So many traders chant that mantra while trading in the markets. Anyone who has ever had money in the markets knows that this is an easy thing to say but much harder to actually do. The emotions of fear and greed creep into our trading environment and influence our trading decisions. My students often ask me if there is a way for them to hold on longer to their trades for greater profits. Fortunately, there are some things we can do to help us to accomplish this.

The first is to have a trading plan that will detail your risk management and trade management strategies. This is such a critical tool to be a successful trader that we involve trade plan development in every one of Online Trading Academy’s courses. Having written rules for managing trades can help remove the effect of emotions on your trading since you will be following a prescribed strategy (basically following your orders) rather than trying to make decisions on the spot. Writing the trading rules down allows you to review them on a regular basis and see if you are consistently following them. You are holding yourself accountable for your actions and are more likely to follow them.

In your trading rules, you should have some sort of guideline as to when you will move your initial stop to breakeven. You could move it when the current profit is equal to the initial risk in the trade. The disadvantage of this method is that you can get stopped out too quickly from time to time. To avoid this, you could move the stop to breakeven once your profit is twice as much as the initial risk in the trade. Or if you have multiple targets for your trade, perhaps you move your stop only after price has moved halfway to your first target in the trade.

In the previous chart, a trader that moved their stop to breakeven would not have been as nervous during the small correction as a trader who had not. When small corrections in price occur in our trades, it often scares us into taking profits too soon.

You can also choose to use rules for adjusting a trailing stop as you are profiting in the trade. This is not necessary for some traders as they let price either hit their target or stop out at breakeven. But if you want, you can create a mechanical trailing stop that objectively exits you from a trade that does not quite reach your target before reversing. One method I use is a moving average. I will exit a profitable trade only if price closes beyond a moving average. This is easy to observe and can also be programmed into most trading platforms to occur automatically. The one thing you may notice about all of the above suggestions is that they are all rule based. We need rule based strategies to become more objective in trading and not emotionally biased.

Another method to help you hold onto your positions and grow profits is to hide the P/L on your platform. In TradeStation, you can see the current P/L of your position in so many places. When you are in a trade you do not need to know how much you are making or losing. You should have planned the trade before entry and should already know the potential loss if your stop is hit or the potential profit if you make it to your target. How is watching the P/L change going to help you? It does nothing but increase the power of your emotions as you become greedy or fearful which results in you breaking your trading rules.

Lastly, get paid for your effort. I trade impulses of the dominant trend. In our courses we teach you how to identify them. Impulses tend to pause, but break through supply or demand on the lower timeframes. Since that is the norm, I will often target supply or demand from a larger timeframe for my profit targets. This allows me to be able to take larger wins and greater profits. However, I am human and not immune to emotions like fear and greed. To lessen the impact of them on my trading, I will often plan to take profits at two or more targets and effectively scale out of a position. The first target will be the supply or demand from the timeframe where I entered the trade and the second will be from that larger timeframe I mentioned. The larger timeframe that I use is determined by a formula that I discuss in the XLT program.

When you take partial profits at a smaller timeframe target, you are more likely to be relaxed and allow the remainder of your position to run to the predetermined target. Already having been paid on the trade will allow you to mentally withstand the one or two candles that go against you or a small correction while you are in the trend on your way to your target.

So, the key to getting greater profits is to create trading rules that can make your trading more methodical rather than emotion based. To be a successful trader, you need to be consistent. To build consistency you need a plan. To learn how to create that plan, join us in one of our courses at Online Trading Academy today.

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