The hardest thing to get right in trading is letting your winners run and cutting your losers quickly.
Something about it goes contrary to our nature. The average person wants to take a profit quickly to make sure it doesn’t disappear. And they want to hold on to a loss hoping for it to come back.
In order to be profitable long term, you have to retrain your brain.
Cut losses quickly.
Before you enter a trade, have a clearly defined stop out.
Many traders get underwater in a trade and then freeze up. They can’t take any actions. Having a clear stop means if the trading vehicle you are using goes to that price, you will get out of the trade no matter what. This keeps your losses small. It keeps you in the game.
A clear plan will keep you from freezing and taking a larger loss than necessary.
Let winners run.
When a trade is going in your favor, don’t be too eager to take profits.
Have a clearly defined area that you expect the stock, option, etc to reach. Have a thesis as to why it will go there. Then let your thesis play out. And if it hits your goal, don’t sell the whole position. Keep a small part on to see where it will go.
If it doubles in value, sell half and ride the rest stress free.
Trade smaller size.
One reason traders get jumpy about their profits and freeze with their losses is they put on too big of a trade.
You have to build up your tolerance both emotionally and financially to put on larger and larger positions. Your risk should never be more than 1-2% of your account. And if you are feeling nervous about that amount, make the position even smaller.
You have to manage your emotions and your money when trading.