The Myth of Running Winners

Long ago, when I was first learning about trading, I first heard this expression, “Cut your losers short, and let your winners run!” It seemed to make sense to me, so I tried to apply that advice to my own trading. The results were not pretty.

The problem, I found, was that that didn’t provide any guidance for the real world. Cut your losers short? What’s a “loser?” What’s a “winner?” How long should they run for?

Now, consistently, when I finally decided a position was a “loser,” I’d close it out, only to find that I’d picked the bottom, and the position immediately turned around and went back up! Similarly, I found myself, time and time again, going to bed, happy with my “winner” and hoping for more (you know, the “run”), only to  wake up to find my nice, little winner was now a loser.

I found that: when you “cut your losers short,” you are accepting a loss, and closing out all possibility of it becoming a winner. When you “let your winners run,” you may be refusing to take the profits that your “winners” are giving you and leaving open the distinct possibility of watching those profits evaporate!

These experiences led me to appreciate the following market trader’s adage: “Bulls make money, bears make money, and pigs get slaughtered.” The pigs, of course, are busy “letting their winners run.”

So, now my philosophy is, “take the money and run!” Set a profit target (and don’t be a pig about it), and close the position when, and only when, the trade reaches that target. That, along with proper money management, will get you ahead.