WHY SELLING HALF HOLDS YOU BACK
Many traders like to sell half of a winning trade. But while banking a profit feels good, is it best for your account?
Is selling half of a winning trade smart?
Many traders say it is. It’s one of the most popular strategies I see.
And it’s not just retail traders.
Plenty of professionals agree. There’s something about partly cashing out of a profitable trade that appeals to people.
I know a bit about this strategy… it’s one I’ve used a lot over the years. I’ve also seen many colleagues scale out of positions.
If popularity is any guide, selling half must be a winner.
But does it really stack up?
Now, there are lots of variations to this strategy. Mostly they involve the timing of the sale. Some traders use a technical indicator as a guide. Others use a dollar value or a fixed percentage.
But there was one I liked best — maybe you’ve tried it yourself…
This is how it went: I’d sell half when the profit covered my remaining risk. This meant my worst overall result was breakeven. I reasoned that it was like getting a free trade.
If only it was that easy…
Yes, it felt good to bank a profit. It was also nice to know I wouldn’t end up with a loss.
But there was a glaring hole in this strategy.
You see, I was halving the size of my winning trades relatively early. Meanwhile, my losing trades were all full strength. This meant my winners had to work extra hard.
It soon became clear that my approach was far from optimal. Selling down my best trades was holding me back. The reality was that I needed to get more from my winners.
Think of it like this: A footy coach doesn’t rest his best players after the opening minutes. He’ll give them time to make an impact. This maximises the team’s strength.
The same logic applies to trading. A portfolio makes the biggest gains when its best trades are firing. Reducing exposure to them is like putting your top players on the bench.
But say you have a big profit. Is it then wise to consider banking half?
The million dollar question
There are two ways to assess a strategy:
- Use trial and error — like I did when I began my career, or
- Use back-testing to simulate real life trading
One of the biggest disadvantages of trial and error is that it takes time. There’s also a risk that you choose a period that has a bias for or against what you’re testing.
A computer and lots of data helps gets around both issues. You can learn more in one afternoon than in a few years of live trading. Back-testing could give you a big advantage.
So, this is what I did…
I designed a simulation to see which strategy makes more money — the first scenario holds each trade until it hits a trailing stop, while second scenario sells half when a trade is up 100%.
Now, I could have used any number of triggers to sell half. For instance, some people sell for a 10 to 20% gain. But I chose 100%, as it’s a popular figure that I often see newsletter writers use.
Okay, what do you think will happen?
Will running profits make more money or will selling half win the day?
Take a moment to think it over. I want you to consider the outcome, and why. This is a fun way to test your trading logic… you’ll see how your skills are progressing.
Check this out:
Let me explain what’s going on…
The simulation runs for 10 years from 2009 and includes hundreds of trades. It assumes a $1,000 in every trade my system identifies. And there’s no allowance for costs or dividends.
You’ll notice a high correlation between the profits for both strategies. But the blue line is gradually pulling away — it has an edge over its cousin. Which method do you think this is?
I’m sure you know. It’s the one that keeps the entire position.
And remember, the simulation sells half when a stock is up 100%.
What do you think would happen if it sold half at 50% or 30% or 20%?
Well, I’ll tell you. It would give up even more profit.
The result from this test is clear cut. Resisting the urge to sell half produces a better overall outcome. The strategy that lets the entire winning trade run does best.
You know, a few big trends could really boost your overall returns. These large moves don’t come along every day. When they do, I suggest thinking carefully before cashing in part of the gain.
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