Let Your Winners Run
I wrote an article a few weeks back essentially describing my comfort with taking losses in a trade when proven wrong.
I made the argument that you can take a loss quite often and still have a net positive by ensuring your “winners outweigh your losers”.
It didn’t dawn on me that while the concept of winners overshadowing losses might be easy to conceptualize; the “how” might not be so easy.
How do you let your winners run?
Outside of staying away from micromanaging and simply leaving your trades alone; I look at it as a “road map” along the way to my destination.
I typically start by analyzing a chart and picking price points. To simplify this, I will identify Resistance 1, 2 and 3. Support 1, 2 and 3.
If I am short a stock, I want to see the stock drift towards those support levels. My first "check point" would be Support 1, I want to see it hit Support 1 first! I also want to see how it reacts to that level. If the first support is accompanied by A LOT of buying then perhaps I have reached my destination and it will be fitting for me to close out my short. If however, Support 1 is tested and then broken; I will hold on to that trade. Because it is drifting in my desired direction.
My next “check point” will be Support 2. Again, I am watching for a reaction. If Support 2 proves to be weak, I will hold on to my position. Why?
Because the stock is drifting in my desired direction.
The opposite is true if I am long a stock, I want to see it penetrate through the resistance levels with force and VOLUME.
Checkpoints don’t necessarily have to be limited to Support and Resistance levels. It can be a series of “red candle sticks”, it can incorporate Moving Averages, Fibonacci levels, etc. Use whatever indicators you are comfortable with.
Map out what the stock “needs” to do, to essentially move in your desired direction and if it continues to hit a “check point”; you’re effectively letting your winners run.
If it does something meaningful to violate your map, that would be the time to “let it go” and fold the trade.
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