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
I’m using Twitter as my trading journal. Feel free to follow along and learn with me. I’ll post the resources I’ve found most valuable below. I’ve attached my evolving trading rules. As you can see, I am continually learning from my mistakes and feel more prepared each day.


Wave theory resources:

https://t.co/zMLJx0Posg

Recommend checking out @StockDweebs newsletter. I don’t practice wave theory myself but have found his picks highly accurate and like to correlate them with my own.

YouTube channels:

TrendSpider @TrendSpider
smithsintheblack @RobInTheBlack
Sara Sabatino @ssabatino84
_ms_izzy @_ms_izzy
Learn to Day Trade @TrueBubbleHead
StockDweebs @StockDweebs
watchjoshtrade @watchjoshtrade
BullTradeFinder @BullTradeFinder
MagicMike @magicmiketrader
Trading crypto is the wild west. I've compiled some threads and cheat sheets to teach you different concepts I use while trading $BTC, $ETH and $ALTS.

I'll link new threads to this post as I tweet them. Don't go off my work alone, use content by others as well!

🟥 Support/Resistance Flips -


🟥 Divergences - CHEAT


🟥 BTC Pairs -


🟥 Funding - THREAD + CHEAT
So I'll give you a breakdown on which website I use to check my DD along with mainly using my PLATFORM as the MAIN source of information. But other websites are also used. . Then I will provide you with a youtuber whose name is RILEY ..

his content from the playlist start with "how to read stock charts". It's precise and on point and short enough for you to get through this week even if you did one video tonight .. I like his teaching method .. he's slow and very easy to understand

As for DD. It comes from many factors. Mainly the trading platform itself has updated news posted on the ticker you want to trade.
https://t.co/1f8wQs1LcA

Really liking this website it has breakdown of the financials & summary of SEC filings. (con'd)

Also a whole bunch of other stuff that it focuses on the companies that you search. As for what I look for?

10-K & 10-Q.
Read 8Ks ..company updates
Also look to see if they did an recent Offerings (S-4 filings)
Also look to see S-3 filings for upcoming dilutions.

cont'd

https://t.co/nxP0hAJ4UH (Great place for quick articles on many stocks that are posted by analysts who do very good work digging info)

https://t.co/KsYqlmTlQ8 for quick news info
https://t.co/v5xGZqWhbn For constant world news

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