6 Steps To Holding Onto Big Winners

The most common question from other traders is how to hold onto winners. Learn why traders sell too soon, and what you can do today to immediately improve your results, and stay in more big winners.

6 Steps To Holding Onto Big Winners

"Why Do I Have Such a Difficult Time Holding Onto My Winners?"

Easily the most often asked question I get from other traders is how to learn how to hold onto their winners. Having learned to overcome this challenge many years ago, I decided to share my thoughts here for others.

I also continue to challenge the claim that "you can't go broke taking a profit", because you can. If you take small profits and large losers, over time, the losers will outweigh the winners and account equity will disappear. If a trader keeps taking hundred dollar winners and thousand dollar losers, over time, that math will erode account equity. Given enough time, big winners and small losers can have a life changing impact on ones account equity.

I want to clarify, as I have before, by stating that I acknowledge there are literally dozens of ways to make money in markets. Trading, investing, long-term, short-term, intermediate-term, technical, fundamental, momentum, low PE, etc. Skilled and experienced practitioners of almost any strategy can make money over time, and I have considerable respect for those who do and their methods. I am not making a claim here that any strategy "doesn't work". I will discuss, however, what has worked for me.

"Why Do We Struggle to Hold Onto Our Winners and How Can We Correct It?"

My core belief, as I have stated before, is that trading is much more of a mental endeavor than anything else. People spend hours per day studying charts and/or fundamentals, looking for clues and data to predict the next market/stock move, but often very little, if any time working on their own mental development, process development or the development of a written trading plan. For the most part we all have access to the same charts, technical indicators, financial statements and balance sheets, yet some people consistently make money in markets, and others consistently lose money. The answer is not always in the charts or the data, but usually lies within the traders actions. The chart doesn't hit the buy/sell button, the trader does. Very often these decisions are based on widely varying trader emotions, bias and random information that they encounter throughout the day.

My belief is that big winners come from big time frames. One or two big position trades can make a traders year, or more. The 80/20 rules applies in trading as well. Many noted traders have said that 80% (or more) of their profits have often come from 20% (or less) of their trades/positions, but these trades need to managed properly. It will take quite a lot of small 1% - 5% winners to overcome the inevitable losing trades along the way to significantly move the needle on a trading account.

What I have strived to do over 21 years is to learn how to take something that can be emotional and subject to randomness or bias, and turn it into a more mechanical , systematic process to help me follow a set of rules and avoid having to make daily, often random trading decisions, based on what I "think" or what someone else thinks. I have a linear thought process, so I will outline my ideas below.


Some reasons why traders "sell too soon":

1.  Human nature - People are naturally wired for instant gratification (to take profits quickly) and to delay pain (hold onto big losers and also holding big winners can be emotionally taxing for many). Sitting in a big winner can be just as emotionally taxing as sitting in a big loser. Maybe more so, some tend to try to "forget" big open losers, but will micro manage every tick on the winner.   

2.  Emotional trading - many do not have a clearly thought out, written trading plan to follow, and they make emotional and/or random decisions based on current market action, their feelings that day or third party input.   

3.  Positive reinforcement - statistically most (> 50%) traders lose money over time. As a result, any time they have a winning trade, many will often close it out to "post a winner on the books" and give their psyche a boost or a "win", or try to make up for lost ground in trading capital.

There are many significant advantages that come from trading from strength (being profitable) than trading from weakness (constantly being in the red). Scared money does not make money. Cool heads and steady hands prevail over time.  

4.  Over-thinking/bias - Charts and fundamental data can be a giant Rorschach test - traders see what they want to see, bullish or bearish. Having no trading plan allows one to fall into the trap of "thinking" a move has taken it's course if they are biased towards closing out the trade. If a trader is looking for a reason to take a profit, it will be easy for them to find it in any charts/data they look at, (confirmation bias).

5.  Outside influence - I have seen many write that they closed out a winning position due to an online article they read, or what someone said on TV or Twitter. Many times the trade continued working to much higher highs. Trading off others is a very flawed approach, for many obvious reasons.

6.  Over-trading - too much risk, too many positions, too much activity, any combination of these. Some traders spend hours a day looking for the next big trade, but often it may be the trade they are already in. Also, too much at risk leads many to get shaken out during any normal pullback in a longer-term uptrend.

7.  No system and/or lack of confidence in system - changing styles, methods or trading approach frequently due to having no process or no belief in the current process.

8.  Fear - fear of profits disappearing, of a winning trade unwinding or just as important, the fear of doing something they have never done before, which is holding on to the big home run trade.


Based on the 8 issues above, here are some actions that traders can start to implement today to improve their results by staying in bigger winners. 

1. Develop a basic, but comprehensive trading plan which identifies
  • time frame
  • risk and return expectations
  • market/security selection
  • entry/exit signals
  • position sizing (how much to risk per trade)
  • industry correlation limits(6 average sized energy stock positions is really one very large energy trade)
  • portfolio risk (how much to risk overall at one time)

When the trading process is pre-planned and entry/exit signals are pre-determined, it helps to remove most of the emotional aspect from the trading process. If one follows the plan, they get an entry signal, size the risk properly and set the stop. The stop loss will manage the down side. There should be nothing else to do except manage the upside exit, only when it is triggered, and not micro-manage the position daily in search of some random data point to dictate the exit.    

2. Stop overtrading, both in frequency and position sizing

In trading, less is absolutely more. Most (>50%) traders overtrade in one way or another. Either too often, too many positions, too much money in positions, too many different styles, or any combination of these. Selling winners too early often comes from fear of loss from having too much at risk in the position or account, so that any normal pullback shakes the trader out. My results increased dramatically when I reduced trading frequency, reduced my position size, and had less overall open risk in my accounts. If your position sizing is too big in a trade any normal pullback may shake you out of the position, after seeing your account equity drop for a few days, only to watch the trade move higher without you. If you have too many open positions, pullbacks may cause you to cut good trades just to slow the drawdown in your account.

Also, one or two correctly sized stocks or ETFs may give adequate risk adjusted exposure. Even if you size the trades right, if you have 8 open energy stock positions in a 15 position portfolio, you are taking on more industry risk through correlation than each position on its own will indicate.  Billionaire trader Bruce Kovner said in Market Wizards "My experience with novice traders is that they trade three to five times too big".

3. Get detached from the money

Maybe one of the hardest aspects of trading is to get detached from the money and the outcome. Many developing traders are still looking for confirmation that they are on the right track to becoming a consistently profitable trader. This can be a very emotionally draining process, so getting detached from the outcome is difficult. It takes time and concerted effort. The way that I learned how to do this was when I had a position that had gone up to the point that I "had" to take the profit, I would sell all of the position except the last 5% - 10% and then I would trail the stop up using a moving average, in my case the 200day sma. Hypothetically if a trader puts $10,000 into XYZ and it goes up 25%, and they feel the need to take the profit, they can sell all except the last 10% ($1,250) and let that position run wherever it is going to go or get stopped out. This process requires the trader to accept that they may give back some profits if the trade gets stopped out. The key here is to leave enough in the open position so that if can be monitored, but that the trader almost "doesn't care" about the money. Over time of practicing detachment, the trader should be able to ratchet up the level of exposure they can stay "detached" from.

4. Learn how to scale

Upon reading point #4, some may be thinking, "What about pushing big winners, trend following and riding the trend 'til the end"?! What is this scaling all about"? This blog is about big winners, but many reading it are struggling with how to hold onto winners at all and trying to learn how to push for the big home run trades is not easy. In reality it is a difficult skill to learn. Football players don't go from Pop Warner leagues straight into the NFL. The is a learning curve and a maturation process. Trading is no different. If someone has struggled with holding winners over time, then the scaling process may be beneficial to them learning how to manage and stay in big winners. Over time, they should become more comfortable with scaling less and holding more into the move.

Traders often make trading and managing positions an "all or nothing" proposition, which is not always the best approach. Instead of making a decision to get all the way out, develop into your process a plan where you scale a pre-determined amount, maybe 20% - 35% of the position based on some pre-determined metric (shorter-term moving average break after a parabolic move, price appreciation (maybe a minimum 25% move up) , momentum reading, sharp ATR expansion, etc) and hold the rest. The key here is to pre-determine what dictates a scaled exit and not just randomly sell.

If the position heads back down, you locked in some at higher prices, if the trade keeps moving higher, you are still in for the move.  Once you take the pressure off yourself to try to be "all the way" right, it allows you to act with a more clear mindset.  If someone sold all of their NVDA position at $30 and the stock is now at $220, that can be psychologically and financially damaging.  By scaling some profits along the way, to take the pressure off the all or nothing process, that trader may still have had a sizeable amount in the original trade.  Scaling once or twice in an entire move may be enough, and I strive to always have at least 50% of my total position open until my final exit is hit. My core program is based on a two step exit process using trailing moving averages, but some trades may never get scaled at all and only have one total exit triggered.

I want to reiterate, there is no "one size fits all" and no "right or wrong". Each trader has a different mindset and experience level. What works for Stan Druckenmiller, Paul Tudor Jones or someone else from a money management perspective, may not be in line with what someone else is comfortable with. Some are more comfortable scaling partial profits at +20% and letting the rest run. Others have a higher threshold for swings in their account equity. Some are comfortable with all in/all out. If someone is struggling with holding big winners though, the scaling option may be very beneficial from a psychological, financial and development standpoint.

5. Focus on one trading method, style and time-frame

There are dozens of ways to make money in markets; There is no "one size fits all". The key is to try to find a method that works best for the trader and their personality and stick with it. Trying to be a longer-term, fundamental trader today and a short-term technical trader tomorrow, usually won't work. The Chinese proverb says "The man who chases two rabbits, catches neither." A trader does not need to excel at every trading method, just one. Once a trader can excel at one trading method, it allows them to operate more efficiently and not feel the need to "reinvent the wheel" every day.

6. Look at longer term time frames

Don't  just look at daily or intra-day charts. Look at weekly and monthly charts as well to give context as to what longer term time frames can do.

Print out charts of some long term home run trades, stocks or markets that have gone up significantly. Post them in your den, office or wherever you trade from. Start with charts of all the winners that you sold early. Did you sell Apple, Netflix, or JP Morgan Chase for a 5% gain only to watch it go up 100% or more after? We all have over the years. Post those charts in plain sight. Also, study some of your bigger long term winners. Remind yourself that bigger time frames often produce bigger winners. You can scale some along the way and always adhere to correct exits, but the numbers don't lie on the longer term charts.

I have shared here my thoughts and action steps that have helped my development along the way. I look to simplify when I can, so in summary:

  • Develop a carefully planned process
  • Big winners come from big time frames
  • Do not overtrade or size positions too big 
  • Try to excel at one method
  • Ignore outside influence
  • Learn to scale profits along the way inline with your process and mindset
  • Eliminate "all or nothing" thinking
  • Strive to improve constantly  

Disclosure: At the time of writing this blog, I am long Apple, Netflix and JPMorgan Chase.