Everyone has heard to “Let winners run and cut your losers short” but what does that mean? The core of this statement is positive expectancy. If you trade a system that has a positive expectancy then you will make money the same way that casinos make money because the odds are on their side. Casinos do not allow people to walk in and drop a million dollars on black on the roulette wheel, table limits is their form of risk management.
Traders can get the odds on their side also if they can control bet size and trade a system that puts the odds in their favor. If you develop a plan that has a 3:1 reward/risk ratio then you can lose 2 out of three times and still make money.
Lose $100
Lose $100
Make $300
—————
Profit $100
With a 2:1 reward/risk ratio you can make money with a 50% win rate.
Lose $100
Lose $100
Make $200
Make $200
—————
Profit $200
Winning in the markets is not all about picking the right trades and being right all the time. It is about keeping losses small and trading a method that gives you the possibility of bigger wins than losses. Every year there are a few big trends that make me all my profits, I have to keep taking entries at critical points to be able to catch them. The bigger your winning trades the less of them you need to make you profitable. The bigger you losses the more winning trades you need to dig yourself out of the losing hole. The key? Stay out of the big losing hole cut losses when you are proven wrong.
The missing key to trading success for so many that they don’t understand is asymmetric trading where losses are kept smaller than wins. This makes it possible to take the stress out of trading and you can make money while only being right half the time. You don’t have to be a genius just a great risk manager and be able to capture trends in your time frame.
Having the discipline to build a trading plan with an edge and execute it over and over again is the key. If you take high probability entries, go with the trend, cut your losses short, let your winners go as far as they will go, and keep your ego away from your account then trading will work for you.