‘Let Your Winners Run’: A Fallacy

Letting your winners run is another misconception that holds many traders back.

It is preached and pontificated as the ultimate fix to your trading. The people who say this, as if it were some magic potion, usually have no idea how or why you trade.

Trading for a living, making a regular and consistent wage, often involves taking small chunks of the market in a reliable fashion. Reducing variance in your results is key to increasing consistency.

Investing in stocks or ETFs over months and years is worlds apart from making a weekly wage from day-trading futures. Trying to combine the two styles can be dangerous.

‘Let Your Winners Run’: What Does It Mean?

 

Most people take it to mean: if you’re up on a trade, try to get more from the market.

This is not how the market works! 

Firstly, the market does not care or even know about your trade. It does not care that you are in profit.

Besides, markets don’t move in straight lines. Your floating profit may be a floating loss soon enough. 

If you have an area where you think your trade will run into trouble, why not get out? Giving a trade a clear and easy run can be key.

Presuming the market will continue through a problem area, just because that’s the direction you want, is dense.

I have even heard traders say that this specific problem is the reason they took so many years to become profitable.

Run This Winner?

Click image to enlarge

In this example, we are long the market from the white line. Our stop-loss is the red line. We have also isolated the purple line as an area we may see trouble.

You’re in profit, congratulations.

If you were in the ‘Run Your Winners’ camp, you may be looking for a new high. Lets get a big winner to pay for all of those losers!

An issue I have with this is, you clearly have no plan before you’ve entered the trade. Why else would you adapt your strategy just because you see green numbers in your P/L column?

Here’s what happens next on the trade:

Click image to enlarge

The market has turned almost exactly where we isolated pre-trade. Had we got out of the trade, we would’ve banked an ‘easy’ 1R.

To my mind, this is always preferable to a ‘maybe’ 3R.

If the market wanted to continue higher, another long position could have been taken, once we are through the problem area. Market may have continued much higher without you.

So what? Your job as a trader is to make money, which you have.

You do not need to predict macro-economic market swings. Leave that to the economists or financial commentators without a position in the market.

Don’t underestimate certainty just because of the ‘Let Your Winner Run’ buzz phrase. Of course if it’s well thought-out and part of your plan, go ahead. Just don’t change your plan because your position is green.

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5 Replies to “‘Let Your Winners Run’: A Fallacy”

  1. You are conflating proper trade management with trading into immediate s/r, making this a strongly misleading article.
    What you should be – and might be – trying to say is that unless you know how s/r works and what your surroundings are, you should not be trading. That is really all.

    1. That isn’t what I’m saying at all. I’m saying don’t abandon your plan in order to ‘let a winner run’. If you think you’ve isolated an area where your trade may turn, why not just get out there.

      I’ve simply illustrated it in the context of my own strategy. Thanks for your comment

  2. Usually what will happen if you try to let your winners run is it will turn around on you and you’ll end up with either a breakeven, loss or many very small winners. At least in my experience that is the case. I agree with your premise it’s much better for your equity curve to take small chuncks in reliable/consistent fashion. There is always the trade-off between going for a high winrate and low R, or low winrate but high R, but you can’t have both. Good article.

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