Beginning (and more experienced traders too) are often confused by the conflicting advice they get from different sources. Some argue that because losses are inevitable you should let any winning trade run and close any losing trade fast so that you can generate a good ratio of the size of the profits of winning trades to the losses of losing trades. Others argue that you should take some profits if you are shown to be correct about a trade. Maybe you won't be correct for long...
I think this largely depends on the nature of the system or model you are using to trade with. Here is a nice diagram that lays out the two most important parameters: How often your trades win, and how much they win when they win relative to how much they lose when they lose. If your system is only right slightly more often than it is wrong or maybe even is right less than it is wrong, then you need to let winners run in order to be profitable. However, if most of your trades are correct the amount you win when you win versus what you lose when you lose is less important. My formal trading model is right most of the time. The winning profit/losing profit ratio though is close to one. Profitability doesn't depend on letting winners run. But if this is the case, letting winners turn into losers is very detrimental to results. Therefore, it might make sense to take some profits when we can. Does this make sense?
So far in January on my IB account I have 11 winning trades and 2 losing trades. The profit to loss ratio is more than 6. So no problems on either score here. But in December I had a couple of big losses than brought my profit to loss ratio down to 0.21! I won 24 times and lost 10 times. So cutting losses is also extremely critical. In December I let losers run and took profits too fast. Even with being right much more often than I am wrong this results in losing money.
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