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Never Let Your Profits Run
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Tom Sosnoff who runs tastytrade is one of the most colorful guys in the investment business. A former CBOE market maker, he is a guy who made a bet that the average American investor is not nearly as dumb as everyone thinks. Tom believed that regular people could master the difference between gamma and delta, theta and vega, iron condor and stangle and built a very successful retail options firm as a result. He sold it to Ameritrade and could have retired to Tahiti, but instead decided to do a daily trading show on the web broadcasting from Chicago. Imagine Howard Stern giving options advice and you kind of get the gist of his show which is not only intelligent but very funny.
I’ve known Tom since the last century and have always had respect for his renegade views and unorthodox trading style, but the other day Tom said something on air that truly blew my mind. He said that the key to successful trading is to manage winners and not give a damn about losers. This is the exact opposite of what everyone teaches you namely that you should cut your losers and let your profits run. As Tom says this is nice in theory, but never works in practice.
I couldn’t agree more.
If you’ve traded for a while you will quickly realize that the markets do not give you opportunities to “let your profits run”. Markets are very competitive two way platforms and price very rarely takes off in one direction and just keeps on going. (They are kind of like New City subway during rush hour. Sure, once in a blue moon you may find an empty car and ample seating, but most of the time its kill or be killed competition- blink and you lose your chance to sit your weary bones down)
So the key to making money in trading is to bank, bank, bank profits while you can. You have to look at each trade as lottery ticket with an expiration date. As long it keeps making you money you hold on to it, but the moment it starts to lose its value you drop it like a hot potato.
In the past two weeks we made money in 11 out of the last 12 trades, but we only scored one triple digit pip winner and all the other trades were basically singles or doubles ( small to medium size gains for the non-baseball fans). But all those little winners add up and after two weeks we were able to add more than 420 pips in gains into our account.
We have been doing this for five years and in all those years we have never had a trade where we let the winners run. We have always taken profits early and often doing all the things that theory teaches you not to do and yet we have managed to make money 4 out the past years which makes me think that Tom Sosnoff is right and that conventional trading advice is total bull-t.