Pro Stock Trading Tip #1 - True Meaning of Cutting your Losses, Letting Gains Run
May 18, 2013 - Posted by Kevin Hsu
In stock trading, it is important to have a trading plan. These are sets of rules that help guide your actions in the market. For example, what technical signals or fundamental indicators will lead you to buy a stock or sell a stock?
In any event, a successful trading plan in one where you "CUT YOUR LOSERS and LET YOUR GAINS RUN".
Why is cutting your losers and letting your gains run so important?
Let me explain to you the importance.
Suppose you have two stock traders. Trader A and Trader B.
Trader A on average loses 56% of the time, while Trader B loses 63% of the time. You might think both of these traders lose money all the time. If you had to pick one trader over the other, you would be inclined to choose Trader A because of the lower lose percentage.
Here are the actual results from Trader A and Trader B.
You can see that Trader A even though she has a higher winning percentage, actually just about breaks even. Whereas Trader B has a lower winning percentage comes out profitable. Both of their percentages are lower than 50%. This means they lose money on trades more often than not. The key is that they cut their losses and let their gains run.
You can see that the average gain of Trader A and Trader B is 149.57 and 387.03 respectively. Contrast that with the average loser which is 116.02 and 127.93 respectively. On average, Trader B's winners makes more than twice the amount of his losers. While Trader A's winners barely exceed the losers.
Conclusion: The secret to making money is having a system where you let the gains run and cut your losses. Even if your system loses money 7 out of 11 times, as long as you let your winners grow, you will make money.