Letting Losers Run...Cutting Winners Short

[Luc1Grunt]

Why is it so much easier to let those losers run?

Why is it "normal" for traders to cut a winer short?

Look back through your short term trades and try to determine what the actual risk to reward was prior to the trade, and what you actually accepted in reality.

[TonyM]

Not being greedy enough, sounds odd but think about it as it relates to the topic question. Letting the loser run because if you can just can get enough to cover the commission it'll be okay or something along those lines and cutting the winner short because of fear. So, in either case not enough greed and definitely not having a plan or not sticking to it.

[netwrangler]

Been thinking about setting bracketed stops [up and down] on a stock position based on probabilities of the stop price occurring and the profit or loss involved. Figure this is a volatility-based model with a trend and/or 'TA indicator' bias developed from regression analysis and folded in to the probabilities.

The key would be to keep score and adjust the stop level guidelines accordingly. The obvious guideline is that your stop level brackets should not be set such that the odds are against your making a profit over a number of trades.

Building the data to back-test this model, and then to simulate in real time, will take a while; but I figure it's a worthwhile pursuit. Maybe Valentine's Day for some prelim results?

[aiki14]

Originally Posted by Luc1Grunt

Why is it so much easier to let those losers run?

Why is it "normal" for traders to cut a winer short?

Look back through your short term trades and try to determine what the actual risk to reward was prior to the trade, and what you actually accepted in reality.

Ego, and Self Doubt.
In the first case, ego. I believed in this stock at X, so at X-Y I wait for it to go back up otherwise I admit I was wrong.
Solution, I set an absolute tolerance for loss, say 8% and I sell and move on. Then I look to see what occurred that I didn't see coming.

In the second case, self doubt. I better get out before it goes down, like the other ones did.
Solution, I set a price at which I will begin taking some off the table, or where I will institute a trailing stop.

I am not so sure I agree that traders cut winners short as much as I think it's more of a "special case" of the first case. The price comes off a high and begins going down, and we fall into the same trap as before and cut into our profits.

[Luc1Grunt]

I remember some time ago sitting on 1500 shares QCOM towards the end of the day and watching my target come and then slowly go. Got greedy with the target and thought I could get a little more. Then watching it slide through break-even and lower. Then, watching a couple laggy-assed indicators convince me to convince myself to hang on a little longer and lower my mental stop. The end of day rally was not panning out, so I then convinced myself that I should see a nice gap on the next day's open. Had a hard time sleeping that night.

By now I have broken key aspects of my own rules: 1) sell at the stop and move on. 2) once the profit target is hit - secure it. 3) do not hold day trades overnight - EVER! 4) do not allow yourself to be convinced of something your mind wants desperately to see.

Well, the stock was downgraded by merril or GS that evening and the stock gapped down over $2 instantly on the open. Well, that was an instant loss on paper of 3 grand and it just kept getting better. It plunged an additional buck and over the next couple days dropped a few more. I convinced myself the bounce was coming so I patiently held. Well, I finally bailed out with a bloody nose and a blown sphincter.

Massive loss. Both financially and emotionally.

As I re-lived the trade over and over for a few days, a couple things stood out.

This stock is known for a high average daily and weekly range. Traded it at least 100 times. I counted on the up-swing to cover my loss because I have seen it done more than once. In this case, it did not happen. The time began eating at me (2-3 days held) and the big red 4 digit numbers in the P&L column were not my friends.

"Hope" became the primary emotion once I held the obvious loser.

"Greed" let me hit my target and then let it slide downward while looking for another spike. I wanted more than it had to give.

"Fear" of a small loss allowed me to discard the break-even then the stop.

Tuition: Priceless.

Kill the losers. Relentlessly enforce stops. Risk to reward is critical in short term trading. If the R/R is not there...why trade it? Turn off the emotions when the bell begins to clang (good luck).

Happy trading.

[Luc1Grunt]

Agreed Aiki, I should have re-phrased "normal" to potential. It takes only once to see paper profits slip away to engrain the lesson in your head. As the stock climbs, the first donw turn shakes the soul a bit. That's where you see the profits get cut short even though the trade may still be panning out.

Of course I'm talking shorter term trades.

Long term...easier on the nerves until position size gets really large.

[netwrangler]

Originally Posted by aiki14

Ego, and Self Doubt.
In the first case, ego. I believed in this stock at X, so at X-Y I wait for it to go back up otherwise I admit I was wrong.
Solution, I set an absolute tolerance for loss, say 8% and I sell and move on. Then I look to see what occurred that I didn't see coming.

In the second case, self doubt. I better get out before it goes down, like the other ones did.
Solution, I set a price at which I will begin taking some off the table, or where I will institute a trailing stop.

I am not so sure I agree that traders cut winners short as much as I think it's more of a "special case" of the first case. The price comes off a high and begins going down, and we fall into the same trap as before and cut into our profits.

FWIW: Studies of casino gamblers show similar behavior

• Borrowing money to get out of the hole
• Quitting early, or
• Not playing just with House Money when ahead and losing it back.

Course the odds are different in casinos. In the stock market, the odds are that you win over time. Still, I believe the psychology that Aiki described applies in both venues.

IMHO: To the extent that we behave more like analysts and less like gamblers we will gain. The adrenaline rush may not be the same. But the extra money helps make up for that.

[netwrangler]

Originally Posted by netwrangler

Been thinking about setting bracketed stops [up and down] on a stock position based on probabilities of the stop price occurring and the profit or loss involved. Figure this is a volatility-based model with a trend and/or 'TA indicator' bias developed from regression analysis and folded in to the probabilities.

The key would be to keep score and adjust the stop level guidelines accordingly. The obvious guideline is that your stop level brackets should not be set such that the odds are against your making a profit over a number of trades.

Building the data to back-test this model, and then to simulate in real time, will take a while; but I figure it's a worthwhile pursuit. Maybe Valentine's Day for some prelim results?

Just figured out that my trading software supports back-testing of Stop-loss/Profit-Exit strategies. This should shorten my data gathering by a bunch!

Back soon.

[primer]

Originally Posted by netwrangler

Just figured out that my trading software supports back-testing of Stop-loss/Profit-Exit strategies. This should shorten my data gathering by a bunch!

Back soon.

What broker do you use? I'm trying to choose one with relatively cheap trades but quality software.

[Luc1Grunt]

http://www.elitetrader.com/br/

Here is a start.

Also take a look at software reviews.

www.stockfetcher.com does backtesting as well.