Cut your losses and Let your Profits run!
How many times we have heard this simple rule of trading? A rule often used in trading that acknowledges the tendency among traders to sell winning positions too early and while they also hold onto losing positions in the hope that the stock will come up quickly.
Most traders tend to take quick gains off the table so early out of fear that the Profits will evaporate quickly.The key to letting your profits run is to not to panic when volatility increases and to maintain your convictions about why you entered into the trade.
How to “Let Profits Run”
Letting profits run isn’t really a trading strategy until an actual exit method is implemented. How long do you let it run for? How do you know when it is no longer “running?” The easiest way to answer these questions is with a trailing stop.
A trailing stop is implemented in a number of ways, number of points, a fixed percentage, below certain moving averages etc.. One strategy isn’t necessarily better than the other. Ultimately, which strategy is better is the one that works for the individual.
Cutting your losses and letting your profits run is nothing more than making decision about the trade before the trade has been initiated. When attempting to make all these decisions during the trade, you get yourself into trouble and make emotional decisions.
Define your discipline prior to investing/trading and not after.