You Can Go Broke Taking a Profit

There’s this old saying I often come across in the trading world, that is banded about between traders as some sort of ancient wisdom. It says “you can’t go broke taking profit”.

The idea basically being that if you take early profits, you’ll do fine. Banking early profits means to not wait for the exit and just take what’s on the table. I’m sure we’ve all felt that pang of wanting to bank because we are fearful of “what if”.  And so on face value it probably seems logical to take the money and run. Besides, if you’re banking money then things feel good, and it doesn’t matter to most how much you’re banking. We could bank a tiny 0.1R profit and still feel like we are getting somewhere. Closing a trade for a win feels good to most, whatever the amount.

In my experience it’s a very misleading piece of advice and I doubt those who pass it around are actually profitable traders.

You see, the truth is, you can go broke taking a profit.

Of course you can.

If your losses outweigh your winners, it’s all over. If you are banking early profits then you are dramatically reducing your chances of covering the many losses you will inevitably experience along your trading journey.

The numbers just don’t stack up.

As a trend follower, we often find that we have more losing trades than winning trades. We will typically see under 50% win rates. As a result, the only way to be profitable is to make sure they few winners we get are large enough to cover the losers. Otherwise the strategy fails.

Now, we can’t simply “will” those winners to be big. They will only be as big as the market allows. We cannot control them. So your only option is to allow those winners to reach their full “potential”.

Think about it. If only 3 out of every 10 trades is a winner, and you are cutting those winners short, then you are sabotaging your own trading strategy. You will NEVER experience a 20R winner. Or a 10R winner. Or even a 3R winner, if you are banking profits early.

So yes, you CAN go broke taking profit contrary to popular belief. And in my experience if you cannot learn to overcome the fear of losing, and cannot learn to let winners run, you are going to fail in the long run.

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Chris Chillingworth is a systematic mechanical Trend Follower, trading and spreadbetting stocks, indicies, commodities and forex markets using mainly End of Day Trend Following Trading systems.

 

Chris is the host of the Trading the Trend Podcast, a show dedicated to Trend Following strategies, as well as The Spreadbet Beginner Podcast, a show dedicated to Financial Spreadbetting using Trend Following techniques, with both shows reaching over 100,000 downloads and counting.

 

Chris has been coaching both beginners and experienced traders since 2014 and has so far helped over 1000 traders and spreadbetters improve their results. Chris provides online video courses to help traders understand what they really need to know in order to become profitable and has always championed that your psychology is more important than your mechanics.

 

Chris also runs a one to one coaching service called the Inner Circle, details of which can be found on his website.

 

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