Being a trader I’m always interested in articles and books on trading. I like to see how other traders do things, and every once in a while I’ll learn something new. I just finished an interesting book on Stock trading the other day. The book itself isn’t important, there are a thousand books just like it, but what I found interesting is what the author of the book tells his readers to do compared to what the author does himself.
You see the author was extolling the same trading axioms you hear all the time: the trend is your friend; don’t hold on to losing positions; don’t average into a declining market – you know the ones – but the axiom that got my attention is the oldie but goodie: Cut Your Losses Short and Let Your Profits Run. Sounds like good advice, doesn’t it?
What I found fascinating is that not only does the author not tell you how to Cut Your Losses Short and Let Your Profits Run, but that he does the exact opposite when describing his own trading! You see this particular trader turned author scalps for a living. And not only is he a scalper, but he’s the most extreme type of scalper: the one that trades for a single tick! That’s hardly Letting Your Profits Run no matter what your standard of a Runner is.
Trading for tight profit targets is nothing new. In fact I’m a big proponent of tight profit targets. I believe tight profit targets increase your probability of a successful trade and to me having a high probability trade is a very important variable and one which I can have direct control over. But what puzzles me is why would this trader/author tell his readers the opposite? Why would he even bother saying Cut Your Losses Short and Let Your Profits Run if he doesn’t do that himself?
It got me thinking about all the trading advice that most people take for granted and how wrong that advice might truly be. All this great advice and yet people still lose money trading. Why is that? I suppose the simple answer is that the advice isn’t that great after all.
To me, trading boils down to one thing, and one thing only: risk control. If you’re able to control your risk, the rest of the trade will take care of itself. It’s like Paul Tudor Jones said: if people concentrated on their risk, instead of the pie in the sky (reward) they would all be very successful traders.
And PTJ should know. He’s one of the most successful traders of our time. I wonder if he pays attention to any of the trading axioms we do? I doubt it.
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