Cut the Losses and let the Profits run!

How to do this in my Trading?

Cutting losses is very important when trading. When you trade on the stock market it is important to close the trade when it goes against you with a stop loss. Assume cutting a small loss and try again later if the circumstances are right. It is better to cut a small loss early than to lose a lot later. In the same way, you should not be afraid to let the operation continue to work when it is working well. You may have higher profits this way. This is something that as a trader you should always keep in mind.

This may sound easy “do more of what works and less of what doesn’t” but it goes against human nature. When trading the markets, we always want to be right. When we trade in the stock market, we naturally cling to losses because we think that “things are going to turn around” and that our operation “will be correct”. In the meantime, we want to get our winning trades off the table as soon as possible because we are afraid of losing the profits we have already made. This is how you lose capital trading on the stock market. When trading, it is more important to be profitable than to be right. So cut your losses early and let your profits run. This is something that all profitable traders do.

You just have to follow one rule

As a trader, you can avoid the problem of making losses, described above, by following the following rule: always look for more profit than the risk of loss you are taking.

This is very valuable advice that is present in almost all trading books. In general, in the markets it is called “risk/reward ratio”. In trading, if you risk the same amount of pips as you are willing to win then your risk/reward ratio is 1:1. If your profit target as a trader is 80 pips and you risk 40 pips, then your risk/reward ratio is 2:1. If you followed this simple rule, and were correct in the direction of the market half the time, you would be making money because you would be running higher profits on winning trades than losses on losing trades. You can also achieve this by following the advice we give in the stock market and trading courses at Traders Business School.

What ratio should I use when trading the markets? It depends on the type of operation you are doing. You must have a minimum ratio of 1:1. In this way, if you as a trader are right half the time it will be at least 0. In general, you will want to use low risk/reward ratios, such as 1:1 or 2:1, when trading high odds strategies such as range strategies. When trading the financial markets, for lower probability strategies, such as trending ones, it is recommended to use higher risk/reward ratios, such as 2:1, 3:1 or even 4:1. Remember that the higher the risk/reward ratio you choose, the less often you need to correctly predict the direction of the market to make money.

Sounds interesting to you, right? Keep learning trading with DTP with upcoming articles on our Blog.

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