Let Profits Run Or Cut Them Short?

We've all been told to let profits run but I think that is an incorrect statement. In my opinion, whether or not we should let profits run is determined by the trading method we are using at the time a trade is entered.

If you are a trend follower and are taking breakouts in many different markets hoping to catch a large move, it is crucial that you let your profits run. Most trend following systems have low accuracy in terms if winning trades so it is important to let those profits run so that those few big wins will hopefully offset many of the small losses you've encountered along the way. So in this example, letting profits run is a must.

But trend following isn't the only way to trade. What if you are trading off a chart pattern such as a head and shoulders reversal pattern. In this example you will have a profit target based on the size of the trading pattern. So letting profits run isn't what you want to do if you are trading this kind of setup. You want to have a profit objective and exit the trade when the market hits your target.

Another way to exit trades is based on time. There are many trading systems that exit a few days after entry regardless of where the price is. In fact, a system that I've written about on this blog exits the trade on the Friday following the week of entry. If you are trading seasonals you will not want to let profits run because you are more concerned about time. Most seasonal trades have an entry and exit date all based on time and nothing else.

So as you can see letting profits run isn't a correct statement. The next time you read about how important it is to let profits run, keep in mind that it all depends on the trading method you are using.