Riding Winners, Cutting Losers
The math of trend following depends on small losses and large gains. Here is why cutting losers fast and letting winners run matters, and how trailing stops put that into practice.
The asymmetry
| Trader A | Trader B | |
|---|---|---|
| Win rate | 60% | 35% |
| Average win | $100 | $400 |
| Average loss | $150 | $100 |
| Expected result per trade | $0 | +$75 |
Hypothetical examples. A: 0.6 × $100 − 0.4 × $150 = $0. B: 0.35 × $400 − 0.65 × $100 = $75.
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