So You Can’t Go Broke Taking Profits ? : Destroying a Common Trading Myth

You have been struggling for a while with your trading, your trades tend to turn against you and you always seem to come out as a loser. Then you realize that the problem is that you have been entering profitable trades but for some reason most have turned into losers and touched your stop loss. What do you do ? When most people are faced with this problem they apply a piece of advice which has been floating around almost forever – you should never let a winning trader turn into a losing one – you simply can’t go broke taking profits. On today’s post I am going to examine this phrase and its consequences and I am going to explain to you why it is so damaging to the profitability of traders. I will tell you why you CAN indeed go broke taking profits and why this – reinforced by everyone’s following of this advice – causes many traders to lose money in the longer term.

The first thing we need to do is understand the nature of this advice and where it comes from. Psychologically when we trade we unconsciously try to increase certain aspects of our trading that feel rewarding while we tend to decrease those that make as feel bad.  The factor that affects traders the most psychologically is the difference between winning and losing trades or the winning percentage. Of course, the winning percentage in itself does not determine profitability and you can have systems with extremely large winning percentages which lose money in the long term. Depending on the average risk to reward ratio a high winning percentage may be much worse than a system with a much lower winning percentage and a better risk to reward ratio.

The idea that “you can’t go broke taking profits” is popularized by traders with limited experience which do not use strategies with clear statistical goals. Since these traders need to focus on short term performance due to their lack of a long term view of what their trading may be like they often advice new traders to “take whatever they can take” from the market and to NEVER let a winning trade turn into a losing one. If you ask a few professional traders you will see that this advice is very bad and almost universally detrimental to trading strategies.

Why is this advice wrong ? The problem with this advice is that it encourages and makes people do the opposite of what successful traders do. Instead of cutting losses short and letting your profits run you are effectively letting your losses run towards your stop loss and cutting your profits short as this advice requires you to take profits or set tight trailing stop targets that make the probability of a reversal and stop out more likely. The problem comes when you lack knowledge about the long term results of your strategy. You feel like you are losing too much in the long term and that it makes “no sense” to have a trade which was 1 pip from a TP turn into a losing one, hitting the stop loss only a few hours later.

The fact is that letting profits get into profitable territory and “give back” is what makes many strategies profitable since in doing so they preserve the probability to achieve extremely profitable trades or a given long term profitability which is simply not achievable by attempting to ensure that all trades that “go into profit” turn out profitable or break even at least. The large majority of systems will in fact not benefit from this as it will hinder their ability to reach the best advantage over the mathematical expectancy of their entries. Losing in trading is a reality which has to be dealt with, trades that go close to a TP and then reverse are a natural part of many trading systems, a natural part of their market exposure which we need to deal with.

Many traders go broke by attempting to avoid taking loses because they constantly hinder their potential for profitability and increase the effect of losses when they are attained. When you believe that you “can’t go broke taking profits” you will be hit much harder when your strategy goes directly into losing territory before going into a profitable scenario. As I have said before, most people who defend this seemingly “intuitive” idea don’t have adequate long term statistical results for their strategies and therefore they do not have any idea of what the effects of doing this are beyond the very short term. Of course, applying this philosophy will make your trading more profitable in the short term – as you effectively avoid losses- but it may affect the long term performance of your trading system in a very bad way.

A good example comes from Asirikuy systems which very rarely benefit from the application of breakeven of trailing stops, many people suggest their use after the first trade that was close to the TP and went into losing territory but after evaluating the true long term consequences of such an application they realize that it only hinders profitability. Many people will actually avoid taking losses and work with a strategy that is deeply hindered and rarely reaches its entry’s mathematical expectancy potential while others will work with strategies that lose money in the long term, deluded to think that they are profitable because of the short term “favorable” results.

In the end the advice that “you can’t go broke taking profits” is very wrong and encourages many undesirable behaviors when using a trading system. This advice is mostly favored by new traders who feel the largest psychological pressure from trades that “give back” but they don’t really analyze the consequences of doing such modifications over the long term results of their strategy. My advice is that you should deeply analyze a strategy and any modifications you do to it so that you can see the LONG term effects of doing so. Attempting to avoid the turning of profitable trades into losing ones can – and does most of the time – have a detrimental effect on the overall statistical characteristics of a strategy because it makes the strategy unable to reach the true potential of its entries by cutting profits short and letting losers run.

If you want to learn more about automated trading systems and how you too can build your own system based on sound strategies and adequate risk and profit expectations please consider joining, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to automated trading in general . I hope you enjoyed this article ! :o)

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