[This is part of the series: 9 Rules On How To Become A Trader]
Rule # 7 on being a profitable trader: Let Go Of Losing Trades.
This is obviously the corollary to Rule #6: Hold on to Winning Trades.
As I have said before, this is all part of trading with Expected Value.
So if 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 letting go of losing trades is simply minimizing the potential loss of a particular trade.
Minimizing the loss of losing trades (and maximizing gains of winning trades) is so important 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 profitable, and scale-able trading system.
This is a little bit like profit maximization in economics.
Maximizing revenue – AND – minimizing costs is required for profit maximization.
In the same way:
Maximizing trade gains – AND – minimizing trade loses is required for maximizing the profit of a particular trading system.
In my experience: Having a trading rule set in advance can comfortably take the guesswork out of when to hold on to winning trades, and when to let go of losing trades.
As always, emotional trading should be avoided.
Buy strength.
Sell weakness.
And never let a loss get too big to handle. Let go of losing trades.
There is always another trade.
