Never let a winner turn into a loser. Great trading advice right? What if I told you that it's advice like this that's keeping you in mediocrity. Most traders don't question the general trading "wisdom" out there, but let's do something a little different this time and shed a little scrutiny on this issue.
If you stop to think about it, this little nugget of wisdom sounds a lot smarter than it actually is in a practical sense. Let's start with the obvious. What exactly is a winner? If you're trading the S&P e-minis, then the technical answer is that you're in a winner when you're up 0.25 points, the smallest increment the instrument can move. So does this mean that when you're up a tick, you should quickly move to break even so that it doesn't become a loser? Good luck ever getting a real profit with that strategy. So what is it then, is a winner a point? Is it a relative amount based on your original risk on the trade? Is it a multiple of this number? When should you say, I can't let this WINNER turn into a loser?
I can't give you an answer because, well, I really have no clue. Instead, I've chosen to think differently about the issue altogether. In my mind, it's futile to try to put a distinct label on what a winner is, and more than this, it can actually be quite unprofitable. To start with why it's futile, well, simply, each trade and context is totally different. What can be considered a good profit in one trade can be peanuts in another one that has much more potential. So why not consider a winner any trade that has reached a point where from the market's perspective you could say that if it returned to your entry point, that would imply that it's failing. For some trades that may mean 2 points, and for others that may mean 10 points. Yes, I said 10 and that's not a typo. In the past there've been some rare occasions where I had 7 or 8 point paper profits (on a 2 point original risk in similar volatility environment to last Spring) and I've let them reverse all the way back for a loss because I didn't think that the market had reached a point where a return to break-even would negate the reason for the trade. Is this crazy? Was I just being imprudent? It may seem so if you only look at one instance, but your view might change if you saw some other trades that were up relatively big (say 6 or 7 points), came back to break-even, but I didn't exit because the basis for the trade was still there, and then went on to eventually become 10, 12 or 14 point winners.
Now is it very hard emotionally when a large profit becomes a loss? Absolutely. But does that mean that we should avoid it at all costs? I beg to differ. You see, no one said that long-term profitable actions are comfortable. It's not comfortable for me when I'm holding a good profit and watch it retrace back to break-even into a potential loss. But if I still believe in the trade, I'm not going to exit just to protect profits, or just so I don't have the stigma of "letting a winner turn into a loser." If I have a good profit and all of the sudden I see something to make me question the market and my odds, then yes I'll often lock in the profit. But I'm not doing it just to obey some conventional trading wisdom that says never let a winner turn into a loser. I'm doing it because it's the correct course of action to take in my view. And if the correct course of action is to hold on despite the potential for what most traders would consider a "winner" to reverse and become a loser, then I'm going to sit with that discomfort and do it.
You see, it's a matter of principle. The problem with this old adage is that it makes traders trade with a fear of themselves. "How could I let a winner turn into a loser? I must be a loser if I do that." Traders that blindly follow such conventional wisdom fear their own negative criticism if they break it, even when it might have been the correct course of action to do so. They might notice that to have some really large winners, you can't always be scared of trades coming back to break-even and thus bailing just so a profit doesn't become a loss. You have to determine what's normal movement, and then allow whatever outcome to be in that context. Why is it so bad anyway to let a profit become a loss? It's only bad to not get out when your reason for the trade is gone, whether it's a profit or a loss. Don't let some dogma force you into being unforgivable with yourself when you see that to trade right in some circumstances, you may have to let a profit turn into a loss. Of course, you can alleviate the self-reprimand by only labeling something a winner once it has reached the threshold of no-return. But ultimately that's just semantics. Every profit feels like a winner and thus it becomes a matter of principle like I stated earlier; If it's correct process, then you shouldn't think it's wrong to break some old trading wisdom.
Of course what I'm talking about here extends much farther than just winners becoming losers. There are endless varieties of this type of crowd thinking that goes unchecked and thus leads to diminished profitability in the name of comfort and conformity. And before the comments start coming in that this advice is too general as some traders are scalpers and aren't looking for big winners anyways, yes I know. But even there it applies if they take it down to their timeframe and point of reference. If they're up 2 ticks and there's potential for 6, they shouldn't be in fear of letting this profit turn into a loss just because it would be considered wrong or it would feel uncomfortable. And in the end this is what it's all about. Are you willing to do what's uncomfortable in the short-term if it will yield long-term profitability? Let me tell you, it's not easy to do. I don't do it perfectly. I still struggle with it every day and sometimes I slip and do what feels comfortable instead of what I know is right. But the point is that I don't settle for the comfort zone. I keep pushing myself to move beyond it and take my trading to new levels.
You don't have to agree with all of this. In fact you can staunchly oppose it. So go ahead. Never let a winner turn into a loser. And never forgive yourself if you ever did so for good reason. Like the title of this post implies, it's your surest path to trading mediocrity.