Cutting Losses & Running Winners Trading Journal

[Nigel-P]

Hello.

My style of trading attempts to really seriously implement the idea of cutting losses quickly and letting winners run, a maxim that surely all traders are aware of.

My philosophy is this. If I make 20 entries and each of them loses 50 pips each I have obviously lost 1000 pips (and I should probably give up trading if those are my stats). But in the grand scheme of things in the forex market (which I will be mainly trading) 1000 pips is nothing, a pair can easily cover 1000 pips in a few weeks.

Say for instance I make the same 20 entries and 18 of them lose; I am down 900 pips. But if the two that are winners go 450 pips into profit each I am at breakeven. If they go 450 pips what's to say they don't go 1000 pips? Or 2000 pips? That's when you start getting into good profit.

Some traders will probably say that I am stating the blatantly obvious here but I think that there is more to this principle than meets the eye. If you really let winners properly stretch their legs you can be a trader who might not be able to pinpoint amazingly accurate entries but who is still profitable.

I intend to diary my trades here and hopefully we can have a good discussion about how we, those of us who attempt to do so, implement the theory of running winners and cutting losers.

Nigel

 

[brewski1984]

Are you going to do 20 random entries with 50 point stop and 1000 point target?

 

[Nigel-P]

Here's an example of a trade I have going at the minute. It's a 4 hr AUDJPY chart and I have three entries, one at 85.10 and two at 84.47/45.

I was very lucky on this one because I didn't actually have any losing trades during my attempt to sell this pair so all is profit. I am currently 1550 pips in profit on these positions. The stops are at breakeven now. It is unusual to get these positions in place without some losses however. But you take good fortune when it comes along and make the most of it.

 

[Nigel-P]

Carrying on from the 4hr AUDJPY chart above. It might look prudent to take the profit and run and move onto the the next trade. But is that running your winners and cutting your losses?

Take a look at the same AUDJPY pair but on the weekly chart. My sells are the orange lines. There could be some way to go down yet, no one knows for sure. Maybe we were always in a bear market and the last two years have been a retrace. I will strictly adhere to running profit and cutting losses for now and see what happens.

Nigel

 

[Nigel-P]

Are you going to do 20 random entries with 50 point stop and 1000 point target?

Hi Brewski1984.

Thanks for the question. I am honestly privileged that someone takes interest in what I have to say.

Randomness is an interesting subject in the context of the markets. Perhaps some traders have read the work of Nassim Taleb. I recommend his work as both being very challenging and useful to trading.

I acknowledge the randomness of markets. Certainly in the short term markets sometimes jump about with little rhyme or reason. I think the way to embrace the randomness of the market is simply to adhere to good risk reward and not to take it personally if the market stops you out. It happens.

In terms of my entries, no, I wouldn't say I enter at random. But I don't try to pinpoint entries either because I think a lot of the time that is futile too. Say you are studying a 5 min chart and you spot a sexy gartley pattern complimented by RSI, Stochs and MACD. You enter a sell according to the pattern and the market suddenly goes 50 pips in your direction. Do you pat yourself on the back and tell yourself you are Jessie Livermore? Come on. There was basically a one in three chance of it going your direction (up, down, sideways). One chance you win, one chance you lose, one chance you stay the same.

I just enter a sell if i think the market has rallied a bit. I enter a buy if the market has dipped. If I am wrong I cut the loss and move on. If I am right I run the position and might add another to it. If you take more from the market when it goes with you than you give to the market when it goes against you then you are profitable. Easy!

You do raise an interesting point in that I do think that you could enter the market just randomly and with proper risk reward be profitable. Maybe some people will disagree with me.

Let's debate it and see!

Nigel

 

[tomorton]

Interestinmg start on a worthwhile subject Nigel, I hope to be entertained and educated here some more as the thread develops.

 

[Nigel-P]

Interestinmg start on a worthwhile subject Nigel, I hope to be entertained and educated here some more as the thread develops.

Hi tomorton Thanks for your comment. I hope too that this thread can evolve into a good discussion about cutting losses and running winners.

Nigel

 

[Hotch]

Question:

If you think your AuDJpy is going to go up tomorrow, but down over the week, are you going to hold the trade?

 

[Nigel-P]

This is a pair I have been looking at since last week, EURCAD. First picture is the 4hr chart. I have entered a couple of short positions, which are currently losers.

I will be looking closely at them on Sunday night/Monday morning to see if they are losers that are ripe for cutting. If this doesn't work out I will take a hit of a couple of hundred pips probably.

The second chart is EURCAD weekly. Perhaps my two sells will turn into +3000 pips or more. Perhaps my two sells will turn into -200 pips. Just have to wait and see.

Nigel

 

[Nigel-P]

Question:

If you think your AuDJpy is going to go up tomorrow, but down over the week, are you going to hold the trade?

Hi Hotch thanks for your question. On this thread I am going to try to stick rigidly to cutting losers and running winners. As far as I am concerned the AUDJPY is a winner until it goes negative. A winner of one pip is still a winner. So unless the the AUDJPY trades go negative they are winners and therefore must be run!

Nigel

 

[Nigel-P]

I remember reading somewhere that successful trading is about being a professional loss taker. Be a cold, hard, calculated, ruthless loss taker. The winners tend to look after themselves.

 

[Hotch]

Hi Hotch thanks for your question. On this thread I am going to try to stick rigidly to cutting losers and running winners. As far as I am concerned the AUDJPY is a winner until it goes negative. A winner of one pip is still a winner. So unless the the AUDJPY trades go negative they are winners and therefore must be run!

Nigel

So you're never going to close a trade in positive territory?

 

[Nigel-P]

So you're never going to close a trade in positive territory?

Hi Hitch

Great question, exactly the type of thing that is good for a discussion on cutting losses and running winners. What do you think you would do? Do you apply cutting losers and running winners in your trading?

For me I think I will just continue to enter positions and let the winners run as the maxim says. Call it a voyage of discovery; let's see what this old trading saying is made of.

My EURCAD shorts are a little healthier in premarket trading, let's see how they pan out.

Nigel

 

[Shakone]

Hi Hotch thanks for your question. On this thread I am going to try to stick rigidly to cutting losers and running winners. As far as I am concerned the AUDJPY is a winner until it goes negative. A winner of one pip is still a winner. So unless the the AUDJPY trades go negative they are winners and therefore must be run!

Nigel

Sorry, but I don't understand. If you have a trade which is up 1550 pips, and you allow it to come back to being just one pip up, then you've lost 1549 pips. it doesn't matter whether you banked the 1550 pips or not, you had 1550 pips, and now you have 1. That's running your losses.

 

[Chartsy]

Do you ever pyramid your trades? Just a suggestion, and it would mean your losers , in terms of lot sizes/dollar loss would be even more substantially lower than your gains.

 

[Nigel-P]

Hi Shakone - interesting way of putting it, I never thought of it like that. But for me, because I was lucky enough to time the AUDJPY trade quite well it never showed a loss. They aren't all like that by any stretch of the imagination.

If I start my account with $1,000 and it goes up to $1,500 unrealised gain and then back to $1000 again, I don't think I have lost anything, I still have $1,000. I see what you are saying though, your view is that I have lost $500. Just two different ways of viewing things I suppose, there's no right or wrong.

If when I started my AUDJPY, it went 100 pips in profit then I allowed it to come back past my entry to minus 500 pips, hoping that it would eventually come positive again, I would call that running a loss because I have allowed the trade to become negative. Hopefully we get some nice losses soon in my trading so we can discuss this more!

Hi Chartsy, thanks for the comment, excellent point. I wasn't planning on talking about this topic just yet but now as you mention it I might as well talk about it a bit. Yes, this is how you supercharge your profits, but you need to be very strict. One of my favorite traders Jessie Livermore advocated this approach.

When I decide that the market has rallied a bit and I fancy a short I tend to put in one sell position, just to test my theory. If it gets knocked out the market just told me I was wrong.

Hard cheese, grow a pair and get over it. Be a professional loss taker and don't cry like a big blouse. The market took a few pips off you, not to worry, when the market does go in your favour you're going to take that loss back together with much much more.

How? Cutting losses and running profits.

BUT if it turns out that you are right and the market has got a bit tired and fancies a turn around, by all means add more positions as long as you are in profit. If you are not in profit it is averaging down losses which is very dangerous. I add positions freely until one gets knocked out, thats the market telling me its time to stop. Bring everything to breakeven and let the winners run. When stops are getting hit thats the market telling you loudly and clearly that its time to take a break.

My EURCAD shorts are getting ripe for cutting. I think I will cut them if they get above the last high, around 1.413.

Goodnight to all.

Nigel

 

[Splitlink]

Hi Brewski1984.

Thanks for the question. I am honestly privileged that someone takes interest in what I have to say.

Randomness is an interesting subject in the context of the markets. Perhaps some traders have read the work of Nassim Taleb. I recommend his work as both being very challenging and useful to trading.

I acknowledge the randomness of markets. Certainly in the short term markets sometimes jump about with little rhyme or reason. I think the way to embrace the randomness of the market is simply to adhere to good risk reward and not to take it personally if the market stops you out. It happens.

In terms of my entries, no, I wouldn't say I enter at random. But I don't try to pinpoint entries either because I think a lot of the time that is futile too. Say you are studying a 5 min chart and you spot a sexy gartley pattern complimented by RSI, Stochs and MACD. You enter a sell according to the pattern and the market suddenly goes 50 pips in your direction. Do you pat yourself on the back and tell yourself you are Jessie Livermore? Come on. There was basically a one in three chance of it going your direction (up, down, sideways). One chance you win, one chance you lose, one chance you stay the same.

I just enter a sell if i think the market has rallied a bit. I enter a buy if the market has dipped. If I am wrong I cut the loss and move on. If I am right I run the position and might add another to it. If you take more from the market when it goes with you than you give to the market when it goes against you then you are profitable. Easy!

You do raise an interesting point in that I do think that you could enter the market just randomly and with proper risk reward be profitable. Maybe some people will disagree with me.

Let's debate it and see!

Nigel

Very interesting read. I'm subscribed.

Split

 

[Hotch]

If I start my account with $1,000 and it goes up to $1,500 unrealised gain and then back to $1000 again, I don't think I have lost anything, I still have $1,000.

I'd say you've lost $500. Think about it, you're in the same camp as those people who trade with no stop, and never close a loser because they haven't made a loss til they've closed the trade.

As to what I would do re: running winners. I think the whole thing is pointless drivel. If you think (there's a good chance) AUDJPY is going to go up 200 points this week, but down 5000 on the month, I cannnot fathom why you'd want to stay short, it's not as if it's not liquid of comms&spreads are massive.

Now if you're just staying in because you think you're constantly at the top, then you're not really running winners, you're just trading, ergo the phrase means nothing.

This post seems rather aggressive, wasn't meant that way

 

[tomorton]

In practice I agree with Hodge in so far as if I thought we'd see a 200pt rise followed by a 5200pt fall,I'd tend to go long and set a 200pt target and certainly not run this winner in the event my estimate was wrong (in a good way) and price went 800pts up. But I would be interested to learn how Nigel and others cope with this kind of situation as I admit I get nothing whatsoever from such under-estimating situations right now.

 

[Nigel-P]

I'd say you've lost $500. Think about it, you're in the same camp as those people who trade with no stop, and never close a loser because they haven't made a loss til they've closed the trade.

As to what I would do re: running winners. I think the whole thing is pointless drivel. If you think (there's a good chance) AUDJPY is going to go up 200 points this week, but down 5000 on the month, I cannnot fathom why you'd want to stay short, it's not as if it's not liquid of comms&spreads are massive.

Now if you're just staying in because you think you're constantly at the top, then you're not really running winners, you're just trading, ergo the phrase means nothing.

This post seems rather aggressive, wasn't meant that way

Wow, it didn't take long for someone to get on their high horse did it? A few posts!

My "pointless drivel" has netted me net 1200 pips since mid last week (I was just logging on to update you on my latest EURCAD trade which I cut this morning at 1.4130). There is absolutely nothing to say that couldn't be double that this time next week (or next month, I'm in no hurry).

You say there is a "good chance" that AUDJPY is going to go up 200 pips this week. With the greatest of respect, Hotch, a "good chance" (based on sound analysis I don't doubt) is not good enough for me to cut my winners. Perhaps you could spend some time reading up on the concept of "opportunity cost".

I did intend to describe here how I will continue to add entries this week and next week and the week after, while all the time cutting losers and running winners. I had hoped that some people might have been surprised by the results and perhaps even seen something that could have applied to their own trading.

Please accept my sincere apologies if my postings offended you Hotch. If I am honest, I thought that this thread would have survived a bit longer than a matter of hours before becoming a willy measuring exercise.

Good trading to all.

Nigel