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In Trading, Ride Your Wins and Cut Your Losses

April 16, 2012 | Comments: 0 | Views: 124

Ride your wins and cut your losses.

Traders will often take their profits too early, yet allow their losing trades go far too long. We see it time and time again that people start trading a good system, but when they are in slight profit, rather than waiting for their profit target to be reached they close the trade early because they're afraid that the trade will reverse on them. Don't fall into this trap; let your winning trades reach their profit target and don't clip your profits early. Stick to your stop-losses and don't let your losing trades get out of control.

If you are following a system with strategic profit targets, why would you second-guess the system and pull out your profits early? In a good trading system a profit target is there for a reason. Technical analysis will have shown that there is a good likelihood of the price reaching that target. This way you only enter a trade when you have the confident expectation of the price reaching a certain profit target. That profit target is defined before you even get into the trade. Of course as market conditions change your profit target may change too, however this will be done strategically and not just out of fear of losing any small profit you have made.

Most people would agree that if you pick 6 out of 10 trades correctly that's a reasonable ratio. You should be able to make money, good money getting it right 60% of the time. If your profits per trade are the same or larger than your losses, you will make money over time. Don't clip your profit short out of fear of losing the little money you have gained.

The successful traders I know plan their entry and exit strategy beforehand. A good trading system will have the stoploss strategically placed. Yet we see traders moving their strategically placed stop losses because they can't handle the thought of accepting a loss. Soon the loss is far greater than they can emotionally cope with, so they keep holding on to the trade hoping and praying that it will turn around, all the while their anxiety is growing. This is foolishness.

If you get it wrong; take a small loss. Wipe the slate clean and start again with a new trade that has been properly and strategically planned. You can now get on with the business of making money. Holding on to a losing trade because you can't face accepting that loss leads to stress and other negative emotions.

All too often accounts are destroyed by traders holding on to losing trades for emotional reasons. A trader can have 5 or 6 good trades go his way and make $200 per trade and be $1000 in the first week of the month and then have the next go against him.

Rather than just taking the $100 to $200 loss he moved his stoploss or even worse; trades without one, in the hope that the market will change direction and bring him back into profit. Soon the market has moved so far against him that the single trade has now wiped out all the profit from his previous good trades. The trader fools himself by saying "Hey, I'm still breaking even for the month."...and lets that trade lose even more. Eventually the trader capitulates and closes that losing trade. But the toll has been extensive.

This pattern of allowing a single losing trade to wipe out the profits of multiple profitable trades is very damaging to a trader's confidence. And it doesn't need to be this way.

Learn your system, learn it well. And trade according to the rules and guidelines that you have learnt from your trading mentors and educators. If you are stopped out, take the loss and move on.

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Source: EzineArticles
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