Real-World Examples of How We Cut Losses Short and Let Profits Run

Apurva Sheth
Let's start with a game today. Say I give you a choice between:
  1. A sure gain of Rs 3,000
  2. An 80% chance of a Rs 4,000 gain and 20% chance of a Rs 0 gain
What would you choose? Note your answers.

Now let's flip the scenario. Choose between:
  1. A sure loss of Rs 3,000
  2. An 80% chance of a Rs 4,000 loss and 20% chance of a Rs 0 loss
What would you choose?

I bet, in the first scenario, you chose option a. And in the second scenario, option b. If so, then you just made an irrational choice.

You chose smaller expected gains in first scenario. An 80% chance of a Rs 4,000 gain means an expected gain of Rs 3,200 (0.8 *4,000 = Rs 3,200), which is less than the sure gain of Rs 3,000.

If you chose option b in the second scenario, then you selected an option with a larger expected loss of Rs 3,200, which is more than the sure loss of Rs 3,000.

Why did you do that?

You made those choices because human beings hate losing and love winning. It's part of our survival instinct. Your overwhelming urge to win led you to go with the sure gain of Rs 3,000, even though that gain was less than the gains of the other option. It's the same reason you went for an 80% chance of losing Rs 4000, even though it was more than a certain loss of Rs 3,000.

This means you are risk averse when it comes to gains, but a risk taker when it comes to avoiding losses.

Unfortunately, such behaviour is detrimental to your trading. And most traders are guilty of it. They tend to take gains off the table too early out of fear that they will evaporate quickly. On the other hand, they tend to hold losing positions in the hope that they will turn around. In both cases, they do the opposite of what they should do: Rather than booking profits early and letting losses build, they should cut the losses short and let the profits run.

Most successful traders make money on a very small number of their trades. So if most of your trades will be losers...and you let them run...they will eat up all your profits and a significant portion of your capital as well.

Now, I know what you must be thinking: Cutting losses short and letting profits run is easier said than done. After all, it's difficult to suppress our innate urge to win.

So today, I am going to show you exactly how we did it in a couple of recent Swing Trader recommendations.

Managing Risk Wisely

It is generally very difficult for a trader to accept his mistake. But it's wise to cut your losses short and exit your trades when they hit stoplosses. This is the best risk management strategy. If you are disciplined enough to exit losing trades, you limit the damage a single trade can have on your capital.

Here's an example: I recommended Bosch on April 26, 2016, after market hours. Our trade went live the next day at 20,100. Our stoploss for this trade was 2.49% below our entry price at 19,600. And our target was 22,000.

Cutting Losses Short in Bosch
 Cutting Losses Short in Bosch

Bosch had rallied more than 30% from its February 2015 lows and touched a high of 21,000 on 31 March. It consolidated and gave back some of those gains in April. It found support along the rising trendline drawn from the February lows. It also closed above a falling trendline drawn from the March top.

Further, the daily volumes were also above the previous 14-day average, which indicated buying interest, and the RSI was in bullish territory. Most of the technical parameters suggested an upside.

However, the stock didn't oblige our view and slipped right back immediately after the breakout. It touched our stoploss of 19,600 on April 29, 2016. We exited this trade with a loss of 2.49%.

Allowing Profits to Accumulate

If cutting losses short is difficult, then letting profits run can seem impossible. The temptation to close a winning trade is always overwhelming. Who doesn't like to book a solid profit and brag about it to family and friends?

But here's an example of how to do it from Swing Trader. I recommended SML Isuzu on April 6, 2016, after market hours. Our trade went live the next day at 850. Our stoploss was 5.88% below our entry price at 800. And our initial target was 975.
Letting Profits Run in SML Isuzu
Letting Profits Run in SML Isuzu

SML Isuzu had corrected sharply from its October 2015 high of 1,452 to its February 2015 low of 638. It built a decent base over the previous month and was forming an ascending triangle pattern on the daily charts. A stock repeatedly forms higher lows in this pattern, which is a sign that bulls are entering the stock at every decline and offering higher prices.

Rising daily volumes supported this view, and the daily RSI was in the bullish zone. This all suggested an upside.

By April 13, the stock had moved up to 882. I trailed our stoploss up to 820 from the initial stop of 800.

By April 20, the stock had moved up to 914. I trailed our stoploss up further to 852 from our revised stop of 820.

It didn't move much till April 26, when it ended the session at 907. We decided to trail our stoploss up further to the previous five-day low of 875.

On April 28, SML Isuzu clocked its highest volumes since October 2015. It was building momentum. So I decided to revise our stoploss up to 900 and the target up to 1,045 from our initial target of 975.

On April 29, it ended the session with gains of 3.42%. I revised our stoploss up further to 934.80.

Finally, on May 2, the stock touched our revised target price of 1,045. We clocked a superb gain of 22.94% in less than a month. The profit was much higher than our initial expectation of 14.71%.

That, dear reader, is how we let our profits run - namely, trailing our stoploss higher.

Cutting losses short and letting profits run is the central mantra of successful trading. Yet, most traders fail to put it into practice. I have shown you how we did it...almost effortlessly...at Swing Trader. Apply this to your own trading. Or even better, consider a subscription to Swing Trader and get a closer look.

Happy Trading.

How do you cut your losses short and let your profits run? Share your views in the Club or share your comments here.

Get Asad Dossani's Best Short Term Investment
Opportunities Delivered Straight To Your Inbox!


Sign Up For Profit Hunter Today... It's Free!
 
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use
 
 
We request your view! Post a comment on "Real-World Examples of How We Cut Losses Short and Let Profits Run". Click here!
7 Responses to "Real-World Examples of How We Cut Losses Short and Let Profits Run"
Ravinder Arora
28 May, 2018
Respected Mr Aporva.. I have read a lot about Stop Loss triggers etc.I do understand that it Stop loss controls & limits one:s losses.Alternatively helps in locking Profit. in ones trade. I am different type of Trader. I simply buy 10-15 stocks, hold them & sell whenever my Target Price is reached. I get out of scrip, if the price goes 15% down to my buy price Any other way to limit my loss. Regards Ravinder AroraLike 
Ravinder Arora
28 May, 2018
Respected Mr Aporva. . I have read a lot about Stop Loss triggers etc.I do understand that it Stop loss controls & limits one:s losses.Alternatively helps in locking Profit. in ones trade. I am different type of Trader. I simply buy 10-15 stocks, hold them & sell whenever my Target Price is reached. I get out of scrip, if the price goes 15% down to my buy price Any other way to limit my loss. Regards Ravinder AroraLike 
Ravinder Arora
28 May, 2018
Respected Mr Aporva. . I have read a lot about Stop Loss triggers etc.I do understand that it Stop loss controls & limits one:s losses.Alternatively helps in locking Profit. in ones trade. I am different type of Trader. I simply buy 10-15 stocks, hold them & sell whenever my Target Price is reached. I get out of scrip, if the price goes 15% down to my buy price Any other way to limit my loss. Regards Ravinder AroraLike 
jkpahuja
15 May, 2016
Well it is always good to place stop loss or trailing stop loss but what happens when the gap up-gap down opening destroy all planning. Any protection in such situation.Like 
Penugonda Prabhakar
12 May, 2016
Iam Penugonda Prabhakar why to lass com and came. you run this not stop any company not com lass simple gain will com growth . this is run it. you will do it correctly. god is there. swing cycle both do it. Yours lovely Penugonda Prabhakar Like 
P
12 May, 2016
Hi How is a 80% chance of losing 4000 equivalent to winning 3200/- , can you clarify, my understanding is that it is either you get 4000/- 80% of the time and get nothing 20% of the time, so please help understand...Like (1)
ASHOOTOSH DUBEY
12 May, 2016
Good example of trailing stop loss. And it's true that booking profit is much easier than loss. I am think it's more human psychology than anything else- the courage to accept that I went wrong. Nice read.Like 
We request your view! Post a comment on "Real-World Examples of How We Cut Losses Short and Let Profits Run". Click here!