Direct answer: what is a worked example of cutting winners?
A worked example of cutting winners is a fully specified scenario where you apply the “close a winning position early” behaviour to numbers, then compare it with an alternative that lets winners continue. The goal is not to predict future outcomes, but to make the mechanics and assumptions visible.
In forex trading psychology, “cutting winners” refers to the tendency to take profits quickly when a trade moves in your favour, even though the original plan or setup could reasonably be managed to capture a larger move. This behaviour is usually discussed as a behavioural error because it can systematically reduce the payoff from the trades that go well.
Mechanism or definition: how a worked example works
To make the concept testable, you separate the stable parts from the variable parts.
Stable mechanics (assumptions you can hold constant):
- Start with one position size and one entry price.
- Define when you call the trade “winning” (e.g., when price reaches a first target).
- Define two exit rules:
- Cut the winner: exit immediately at the first profit trigger.
- Let it run: exit only at a later profit trigger.
- Apply the same costs model to both rules (or explicitly set costs to zero to isolate the behaviour effect).
Variable market/provider conditions (not assumed constant in real life):
- Spread and trading costs vary by time and platform.
- Slippage and execution quality can change realised results.
- The market path can reach later targets or reverse before them.
Evidence or example: one transparent numerical scenario
Assume a simplified forex price process with the following conditions:
- Entry price: 1.0000
- Position exposure: 1 “profit unit” corresponds to a 1.0% move in price, so we can track profit in relative terms rather than claiming real pip math.
- Costs: assume 0 transaction costs and 0 spread for clarity. (This isolates the behavioural timing effect.)
- Two profit triggers:
- First trigger (T1): +0.50% from entry
- Second trigger (T2): +1.20% from entry
Now assume the market moves as follows during the trade’s life:
- The price reaches T1 (+0.50%) at some time.
- Later, the price either reaches T2 (+1.20%) or reverses. For this worked example, assume it does reach T2.
Option A: cutting the winner (exit at T1)
- Profit realised at T1: +0.50%
- The trade is closed before the additional +0.70% (because 1.20% − 0.50% = 0.70%).
- Total profit for this trade: +0.50%
Option B: letting the winner run (exit at T2)
- Profit realised at T2: +1.20%
- Total profit for this trade: +1.20%
Direct comparison (same path, different exit time)
- Difference in realised profit: +1.20% − +0.50% = +0.70% in favour of letting the winner run.
Material limitation of this comparison: the conclusion depends on the market path reaching T2 after T1. If instead the market hits T1 and then reverses before T2, cutting winners can avoid giving back profits. That is why you cannot treat any single scenario as proof of superiority.
Limitations and risks: what can fail and how to verify
1) The “path dependency” problem
Cutting winners can look beneficial in markets where price frequently reverses shortly after reaching a first profit level. The behavioural rule can reduce downside from “profit give-back,” but it also reduces upside when moves extend.
A reader can verify this by constructing multiple paths:
- Path type 1: T1 hit, then reverse before T2 (cutting winners may perform better).
- Path type 2: T1 hit, then continue to T2 (letting winners run may perform better).
2) Costs and execution can change realised outcomes
If spreads, commissions, or slippage exist, the timing of exits affects net results. In the worked example, costs were set to zero to isolate timing. With real costs, both options can shift.
Verification method: repeat the same calculation including a simple cost per exit, then check whether the timing difference still produces the same sign.
3) Risk controls are not included
The example only compares two exit times for the same trade path. It does not model changes to stop-loss placement, exposure changes, or whether earlier exits allow you to re-enter.