A trader explains why holding losing mean-reversion trades destroys your edge. One large loss from hold-and-hope wipes out dozens of small wins. The fix: exit immediately when your signal says to, cut the loss, and move to the next trade.
When you're faced with a mean reversion trade that's going against you, the natural inclination is just to hold on and hope that it turns around and bounces back in your favor. Now, the problem with this is, if it doesn't and it keeps going, you're going to end up with a massive loss. And with mean reversion, all of those small, tiny gains are not going to add up to enough to compensate for that massive loss that you've just incurred. Hold and hope in mean reversion is one of the most dangerous things you can do. If you get an exit signal and it's a loss, get out of the trade. Move on to the next one. Keep those losses contained. If you let them get out of control, the expectancy of the system will fall apart. You'll end up with a massive drawdown and a huge financial headache. Hold and hope not a strategy.
