Cut short your losses, let your profits run on.
This principle above is the central tenet of trend following, a successful strategy for trading systems and CTAs alike. Digging through history, this maxim can be traced back all the way to David Ricardo, an eighteenth century British economist and trader, who retired a millionaire (wikipedia).
According to an 1838 book, The Great Metropolis, Vol II by James Grant, David Ricardo defined his golden trading rules as:
“As I have mentioned the name of Mr. Ricardo, I may observe that he amassed his immense fortune by a scrupulous attention to what he called his own three golden rules, the observance of which he used to press on his private friends. These were, “Never refuse an option* when you can get it,”—“Cut short your losses,”—”Let your profits run on.” By cutting short one’s losses, Mr. Ricardo meant that when a member had made a purchase of stock, and prices were falling, he ought to resell immediately. And by letting one’s profits run on he meant, that when a member possessed stock, and prices were raising, he ought not to sell until prices had reached their highest, and were beginning again to fall. These are, indeed, golden rules, and may be applied with advantage to innumerable other transactions than those connected with the Stock Exchange.”
This makes trend following, a trading strategy that has delivered trading success, in use for at least the last four centuries. Contact us if you’d like to discuss how we can assist you trade the markets with this timeless strategy that is trend following.
Hat tip: AuTraSy / Jez Liberty (post)
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