[This is part of the series: 9 Rules On How To Become A Trader]
Rule # 6 on being a profitable trader: Hold on to Winning Trades.
The decision to holding onto, or get out of, winning (and losing) trades is an issue that should define a large part of your trading philosophy.
How do I deal with winning trades? And exit winning trades?
How do I deal with losing trades? And exit losing trades?
This issue is especially important when you are trading by using Expected Value.
If in trading by Expected Value, the goal is to maximize the gain per trade and minimize the loss per trade (as well as your winning trade %), over a large number of trades, then the act of holding onto winning trades is simply maximizing the gains of a particular trade.
Maximizing winning trades is crucial because, even at a 50% chance of loss and a 50% chance of gain on a trade, you can be a profitable trader by having larger gains and smaller losses:
Expected Value = (50%)(-$100)+(50%)($120) = $10
A $120 average gain, and $100 average loss can even make for a trading career! A $10 profit per trade may not look like much – but importantly, it is scalable.
What if you are averaging 100 trades per day?
So, if you sell sugar and make $2,500 on the trade, do you need to exit the short when you give back $600 in profits? Or, do you stick with the trade and give up $1,500 in profits before sugar goes down another $2,000 worth of gain in your favor?
If the question of when to enter a trade is answered by a signal or some sort of system – this should also be the case for exiting a trade.
The answer of when to get out of, or when to hold onto a winning trade should be the same answer for when you should enter or exit any trade.
With a system, a trade should be entered when a signal is hit- and a trade should be exited when a signal is reversed, or when a stop is hit.
Obviously, emotional trading is to be avoided – no matter the trade.
This is not rocket science. Have a system, and trade your system.
Don’t let selling winners too early ruin your long-run returns.
Use your common sense and your trading system to follow the old adage: Let your winners ride!