You always hear people let your winners ride or cut your losers early. Easier said than done, right?

Well, it's a mathematical fact that implementing this will improve your trading profits

The math behind leaving runners on and cutting losers early 👇👇👇

When trading, you have a 50/50 chance of being right. No matter which side of a trade you take, the stock can either go up or down.

There are certain indicators, levels, or other ways you can increase your odds of being right >50%, but you'll never get significantly higher
So, if our trading record is going to be ~50% right and ~50% wrong, how do we make money?

You HAVE to let your winners run and cut your losers early.
If your losers and winners are the same size (eg losers are -10% and winners are 10%), then you have to win 51% of your trades to make money

Example: you take 100 trades for $100. Winners win $10, losers lose $10. To profit, you need 51 winners (+$510) and 49 losers (-$490)
HOWEVER, if you let your winners run and cut your losers early, the # of trades you have to get right decreases

Example: you take 100 trades for $100. Winners win $20, losers lose $5. To profit, you need 21 winners (+$420) and 79 losers (-$395)
Instead of needing to win the majority of your trades (51%), you only need to win 21% to make money!

You can essentially lose 4 out of every 5 trades and still make money if you simply let your winners run and cut your losers
Now, this example was extreme to make a point, but hopefully you get it. If you risk/reward is:

2:1 (winners run 20%, losers stopped out at 10%), you only need to win 34%
3:1, 26%
4:1, 21%

You decrease the # of trades you need to hit by having your winners outweigh your losers
How can you implement this?

1) Have a rule on your stop losses. Personally, every trade I enter I immediately set a STOP order for -10%
2) Have a target profit level for winners. For me, I like the 2:1 risk/reward so once a trade hits 20% profits, I start to scale out
3) Have a trailing stop loss. Once I hit 10% profits, I move my stop loss to 0%. Every 10% increase, I increase the stop order 10%.

So when my trade hits 20%, I scale out part of my position and move my stop order for the rest to 10% profits
Mentally, it may be tough to set such a tight stop loss. Trades can definitely move down 10%, get stopped out, then go on to rip and be huge gains that I miss out on.

Remember, YOU CAN ALWAYS RE-ENTER.
If a stock breaks a key level and you enter, but then drops below by 10% and you get stopped out, that's okay.

1) Your thesis of it breaking the level is no longer valid
2) If it breaks above the level again, you can just re-enter
Hopefully this helps people put hard data to the advice of cutting your losers and letting winners run.

Special thanks to @AdamSliverTrade , @notmrmanziel , @TradingWarz , and the rest of the #LDL crew for getting me on this path and helping inform threads like this

More from Tradingthread

THREAD // How I Invest

1. Successful Investing starts with Education
2. Psychology of Trading & General Rules
3. Essentials of Fundamental Analysis
4. Master Technical Analysis
5. Screening for Stocks
6. Making a Watchlist
7. Money Management
8. Diversification of Accounts

1 // Successful Investing starts with Education

Following 2000-2002, I realized that I needed an education to help me understand many of the topics mentioned in this thread.

So, I started to educated myself using books. Seek mentors as well.

Then


2 // Psychology of Trading & General Rules

Develop a working SYSTEM (for you)
Preservation of capital
Consistent profitability
Cutting losses short
Superior returns

Understanding “You”:
What is your general personality?
What influences your decisions?
What is your lifestyle?

3a // Essentials of Fundamental Analysis

Earnings Per Share:
1. % Change in Latest Qtr EPS vs. Same QTR Prior Year
2. % Increase in Next Year’s EPS Estimate vs Prior Year’s Actual EPS
3. % Change in Latest EPS, trend past several qtrs
4. Annual % EPS Growth Rate of Last 3 Years

3b // Essentials of Fundamental Analysis

Sales / Revenues
1. % Change Latest Qtr’s Sales vs. Same Qtr Prior Year
2. % Change Latest Reported Fiscal Year Sales vs. Prior Year
3. % Change in Latest Sales, trend past several qtrs
4. Annual % Sales Growth Rate of Last 3 Years
Trading view scanner process -

1 - open trading view in your browser and select stock scanner in left corner down side .

2 - touch the percentage% gain change ( and u can see higest gainer of today)


3. Then, start with 6% gainer to 20% gainer and look charts of everyone in daily Timeframe . (For fno selection u can choose 1% to 4% )

4. Then manually select the stocks which are going to give all time high BO or 52 high BO or already given.

5. U can also select those stocks which are going to give range breakout or already given range BO

6 . If in 15 min chart📊 any stock sustaing near BO zone or after BO then select it on your watchlist

7 . Now next day if any stock show momentum u can take trade in it with RM

This looks very easy & simple but,

U will amazed to see it's result if you follow proper risk management.

I did 4x my capital by trading in only momentum stocks.

I will keep sharing such learning thread 🧵 for you 🙏💞🙏

Keep learning / keep sharing 🙏
@AdityaTodmal

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