Cut your losses and let your profits run! Who hasn’t heard that familiar trading “truth” and can understand that meaning of it.
On the surface it seems to make a lot of sense. Many traders do the exact opposite where they:
- Cut winning trades off out of the fear of the market taking back some of the gain
- Let the losing trades keep losing in the hope that it comes back
Do those two things enough times and you can be guaranteed that your trading career will be finished long before it gets a change to get going.
This applies to any Forex trading strategy you may be using. This applies to both indicator based trading and trading via price action (my favorite).
There is a huge problem, especially with newbie traders, of following these sayings blindly.
So why do I say that it makes sense “on the surface”.
The Truth About Letting Profits Run
The problem with simply saying “let your profits run” is that it never mentions when to get out. It never mentions that there are times you should not let your profits run.
This chart is in consolidation and there are trades indicated at each of the squares that would have your trade in profit. Letting profits run in two of these trades could have given you a scratch trade when you were full in profit.
And that’s just with this outcome. This is hindsight.
It is quite possible that the first short Forex trade not only returned to break even but could have just as easily busted to the upside. This would have been disastrous for any trader that could have lead to revenge trading.
In the last short trade, even though there is a price action trading clue that the downside break was coming, that is just a probability. It could have turned around on you.
Could we make a trading rule out of this situation?
Profits Run Trading Rule In A Range: Don’t. Take your profits at the opposing zone and position for a breakout trade if one occurs.
In other words, ensure you understand what condition you are trading in the market. In this example, we were trading in a range where letting your profits run can be a disaster.
Higher Time Frame Considerations For Forex Traders
I know many of you love to day trade (even if the stats say you will eventually blow your account) and often times that means sticking to one chart.
But what happens if you are running a nice long day trade in a currency and are many pips in profit…but you have tunnel vision.
This big chart is a one hour time frame Forex chart. Let’s break this down:
- Strong momentum push resulting in consolidation
- Beautiful “fakey” setup which gets you into the market before the break
Price rockets up right into consolidation again. Break to new highs which many traders would take part in.
Right into consolidation again and if you are holding longs, this constant breaking to new highs looks great!
You are letting these profits run nicely to the upside.
The problem is you’ve not taken into account what the inset box is showing.
The inset is a weekly chart and the grey arrow points to the candle where the huge down move on the big chart originates from.
You were holding longs right into a former resistance zone but you were doing what the “sayings” tell you to do. While this is the retail market, it’s likely you didn’t get hit with slippage on this trade if you had your stop right under the last price compression.
But if you were letting profits run, you should have had a further stop since consolidations can be broken yet not invalidate the trade.
If you had your stop loss below the second last consolidation, that one hour candle wiped out over 100 pips of gain.
Day trading rule: Ensure you look to higher time frames for roadblocks such as a former zones of support and resistance. If approaching these zones, tighten stops or watch price action for weakness and take your profits.
This is the problem we this kind of trading wisdom: There is no context.
Is Letting Profits Run A Good Idea?
It certainly is especially in Forex which when it trends, can do so for a long while. But you have to know:
- The conditions you are trading (range bound)
- Are there roadblocks close by?
- How to place your stops so you let the profits run, don’t get knocked out due to a price spike and at the same time, not give back too much in profits.
I think one of the best things a trader can do is take these “truths” and think deeply about the implications of them.