In today’s episode, we are going to be focusing our discussion on some strategies that traders can use to overcome the psychological barrier of letting profits run.
After all, one of the golden rules in trading is to cut your losses quickly and to run your profits but the reality is that it’s easier said than done!
This concept itself makes intellectual and financial sense, however, when it comes time to actually execute this, most traders fumble and actually do the opposite – they cut winners too soon and let their losers run.
Take a moment now to reflect on your own trading experience to see if this rings true.
How often do you get out of winners too early and watch the markets run without you?
How about your losses? How often do you give your trades more “room to breath” and end up running your losers?
If you find that this is a common occurrence in your trading, then today’s episode is for you!
What’s interesting to note is that our natural instincts are the opposite of what is required in order to become successful in trading:
For example, as humans, we do not like to lose because we are conditioned to be right through our societal upbringing.
This manifests itself in our attachment to the ego – taking a loss in trading can be “seen” as being wrong and therefore being wrong can be a hit to the ego so we try to avoid losses while taking profit early to confirm we are right and stoke the ego.
So how can you go about reconditioning these instincts to serve you?
Try some of these strategies:
1 Accept on a deep level that losses are a part of trading
Before you can apply any of the other strategies to your trading, you truly have to be comfortable and accept the fact that you will take losses in your career.
Losses are a reality of trading and to believe that you are the exception to the rule is a fast track to disappointment and frustration.
The benefits of being comfortable with losses to mean that you can maintain your focus on executing your trading process instead of focusing on the result of that last trade.
2 Battle test your strategy
One of the recommendations from Trading in the Zone by Mark Douglas is to trade a specific strategy for 100 trades before risking any money and to journal each trade.
Doing this, and keeping track of your results, will give you the information you need to quantify your edge which is important because it’s going to be difficult for you to let your winners run if you have limited experience with that specific set-up!
It’s a lot easier on you mentally to hold a winner when you know from your journal that on average your setup hits target say 70% of the time.
3 Have predefined stops and targets for each trade
When you enter a new trade and you have money on the line with an uncertain outcome, your mind becomes your worst enemy.
It’s easy to wind up letting your losses run and cutting your winners early when emotions creep into your trading but when you predefine your stops and targets for your trade, you keep it objective and much easier to execute and manage in real-time.
4 Take partials and leave a runner
One of the best ways to learn to run your profits is to get paid on 75% of the initial portion of the position at your predefined targets and to the last 25% to potentially run for extended targets
This method allows you to get paid on the initial trade idea and removes the internal dialogue you have that’s screaming at you to get paid while you have profits.
We’re going for singles and doubles, here but on occasion, that runner might just become your next grand slam trade!
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