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Trading Tips

Learning to let your winners run

I came across a forum thread recently in which the poster made the following observation:

When I’m in the trade I always watch it and see it pull back and then sometimes i take myself out. Once I take myself I look at the pair the next day or two days and see it made the complete move and if i just didn’t touch it would of completed.

I think a solution to this is once i get in the trade only watch the daily chart so i can’t see these moves..

This is a classic case of what in academic terms is known as the Disposition Effect. That’s our tendency to want to take profits quickly and to let losers run in hopes they turn around. It’s based on the idea of loss aversion. Basically, we feel the pain of losing more intensely than we feel the joy of winning. Think about your own life – trading and otherwise. Does that sound about right?

The poster’s idea to not watch the chart and thus avoid the temptation to exit a winning trade early is one way to go. Unfortunately, it doesn’t really solve the problem. It merely attempts to avoid having to deal with it.

A better solution would be to learn to disconnect emotionally from the results of any given trade. That’s not easy, to be sure, but if you can do so you’ll not only help to avoid things like cutting winners early and/or letting losers run, but you’ll also turn your focus on your bigger picture performance, which is where it should be.

By John

Author of The Essentials of Trading

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