How to let your Winners Run

How to let your Winners Run

Written by Katie Gomez

As a trader, you have probably heard the phrase, “let your winners run,” or some iteration of it at least once. But what does it really mean? Today, I’ll explain the origin behind this phrase and show you how to implement it in your trades. 

Let your winners (or profits) run is a common investing expression that encourages traders to resist the urge to sell their shares too early when emotions are heightened. But how do we know when it is too early or too late to cut our losses? Well, it doesn’t require a crystal ball to determine the right time to sell, but it does require something more challenging: patience.

Not giving in to emotional impulses to buy and sell is much easier said than done for traders. 

Most traders favor selling early, not because they think it’s the best time, but out of fear of whe position plummeting quickly. On the flip side, traders tend to hold onto more significant losing positions longer than they should, hoping they will rebound. These classic examples are led by the two most powerful emotions in trading: fear and greed.

Due to these emotions, traders often prefer to have some sort of exit strategy (i.e., stop-losses) to lock in a predetermined profit instead of simply letting their profits run (Hayes, 2022). One explanation for why traders do this is because they desire to feel some semblance of control when things start to go awry in their trades. The fear of what may happen becomes so strong that it outweighs the logical data proving otherwise staring at us in the present, leading us to sell too early. We sell to avoid the impending emotional turmoil we think is looming.

Fear and greed are powerful, but the more knowledge and experience you acquire as a trader, the less control your emotions will have on your decision-making. However, “letting your winners (profits) run” seems impossible when just starting out, given the emotional weight holding you back.

Inexperienced traders struggling to follow this seemingly simple trading rule would be wise to first practice in a simulated trading room before risking actual money. Of course, when you practice, the #1 thing you’ll want to watch is your Profit and Loss (PNL) to determine if you are making or losing money on a particular investment.

When you trade in the simulation mode, you’re simply seeing what works and what doesn’t, honing in on the method, without having to fight the emotions of real money. Once you leave simulated trading mode, your confidence will be tested because you start risking actual money, not “practice money.” Simulated trading aims to help you acquire as much knowledge and experience as possible to eventually let logic outweigh the emotional cloud looming over every trade (waiting to rain on your parade).

So, it would be wise for you to start significantly smaller in terms of initial investment. For example, when you see $500 in your PNL, fear could easily convince you to sell by reminding you that this is real money, “you could go to a fancy dinner or go on a trip with that kind of money; it’s not worth the risk!” On the other hand, the greed inside you might be swaying to stay in it longer by reminding you what it would feel like if you were to sell now and it shoots up 10x, you would be kicking yourself with regret. Trading is a constant battle between these two emotional demons—the one you feed more often wins. Learning to tune out both emotions and instead follow logic when making your decisions is the ultimate goal that will lead you to success. 

How do I know when to sell a stock?

One of the main reasons traders cut losses early is due to a phenomenon called loss aversion, which behavioral economists define as traders seeing potential losses as more harmful (psychologically) than equal gain (Hayes, 2022). To help guide you back to reason when this fear starts to take over, here are a few reasons why you should consider selling your stock:

  1. The stock price has fallen dramatically. 
  2. The stock is taking up most of your portfolio and has been doing harm overall.
  3. The stock has reached an unsustainable or outrageous price level (might as well have a neon flashing red light saying sell above it.
  4. Buying the stock in the first place was a mistake.

Using this compromise to let your winners run

If you are still struggling to time the market, regulate your emotions, or make the transition from simulated trading to actual trading, there is a compromise for traders: sell half. When you sell half of your position, no matter how the market plays out, you win. For instance, if the stock goes higher, you still feel like a winner because you are still in the game; you can always buy more. Additionally, when you sell half, you can still pay yourself, reinsure peace of mind, and move forward more confidently without everything on the line. 

While letting your winners run is a simple and rational trading strategy, our emotions make it much harder to execute. While the simulator helps you build confidence and trading knowledge, all of that can quickly go out the window once you leave and real money is at stake. Selling half is the best way to let your profits run and cut your losses because you get the best of both worlds; it’s a loophole many traders don’t often utilize due to their all-or-nothing mentality. Visit Trade Ideas to get started with Brokerage Plus and start your trading journey today.