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method

Letting Profits Run Vs Taking Them

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I've been trading for about 2 years and I have gotten to the point where I can enter in reasonably profitable spots and limit my losses quickly.

 

However, one sticking point I have is knowing when to take profits vs letting profits run.

 

I know that most of the greatest traders (livermore, soros) advocated and practiced going for the homerun and this is what I have been trying to implement into my trading. However, there have been several incidences where the trade initially went very well (I'm talking 10 tick risk : 100+ tick running profit) and then promptly reversed. In fact, the see saws in my P/L graph is because of these movements.

 

I have been reviewing some of my profit taking patterns and it appears the most solid, consistent growth in my P/L curve occurred when I was taking profits in a reasonable timeframe rather than letting them run.

 

Of course I would like to complement this solid growth in P/L with some extra spurts here and there by letting profits run, but I am struggling to do this in the timeframe that I trade (usually 1 to 2 days).

 

I am interested to hear what TL'ers thoughts are on this topic.

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I have done some work on this, thought about it long and hard and come to the one conclusion that makes sense for me.

Consistency.

what ever you do, this is vital. If you wish to run a "' jobbing account"", and a separate "" let them ride"" account, then have different plans for both and don't mix them up.

Sometimes it will work, other times it won't - where many get into trouble OR have constant nagging issues that there is a better way, is when they mix the two.

Also if you cant do both, then pick the one that suits you.

 

Often when trying to capture the best in both worlds results in getting the worst of them.

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  SIUYA said:
Often when trying to capture the best in both worlds results in getting the worst of them.

 

Yep, well said.

 

There's no perfect answer here as you have to decide whether you want to grab your profits in chunks or get a bunch of small trades while waiting for that big one.

 

I wish I had the answer for you but it's a personal/personality thing IMO. Some people love grabbing that huge profit and are ok with taking lots of little ones while you wait for it; others like myself like to grab it in chunks and try to accumulate enough chunks.

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  method said:
I've been trading for about 2 years and I have gotten to the point where I can enter in reasonably profitable spots and limit my losses quickly.

 

However, one sticking point I have is knowing when to take profits vs letting profits run.

 

I know that most of the greatest traders (livermore, soros) advocated and practiced going for the homerun and this is what I have been trying to implement into my trading. However, there have been several incidences where the trade initially went very well (I'm talking 10 tick risk : 100+ tick running profit) and then promptly reversed. In fact, the see saws in my P/L graph is because of these movements.

 

I have been reviewing some of my profit taking patterns and it appears the most solid, consistent growth in my P/L curve occurred when I was taking profits in a reasonable timeframe rather than letting them run.

 

Of course I would like to complement this solid growth in P/L with some extra spurts here and there by letting profits run, but I am struggling to do this in the timeframe that I trade (usually 1 to 2 days).

 

I am interested to hear what TL'ers thoughts are on this topic.

 

the best place to exit a LONG is the best place to enter a SHORT

 

the best place to exit a SHORT is the best place to enter a LONG

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In order to be able to capture intraday profits AND still stay in the move I developed a Re-entry tecnique where I would add back my scaled out position with a tighter stop than the original entry. As an example using the ES, if I exited/scaled at a bar's high tick extreme or some target - but momentum was still in my direction, I will add back the scale out on a pullback of approx 6 ticks usually near an 8EMA average. Very often this marks the end of a (small pullback) and allows me to get into the next push back up with a full position on.

 

My logic was based on my observation that I hated seeing the loss in profit that was available while the pullback occurred which usually was this 6 ticks. So why not get out at the high (in a long trade) and get back in with a tight stop?

 

By having a really effective "re" entry technique, you can take you profits and let them run.

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  Tams said:
the best place to exit a LONG is the best place to enter a SHORT

 

the best place to exit a SHORT is the best place to enter a LONG

 

That's not necessarily true tams. Often I get a short or long signal that provides profit potential and by the time an opposite trade shows that trade has a lot less profit. You may argue that there's a system flaw but I am not interested in being in the market at all times. And your response is just that - always in. And for the average retail trader that means a lot of flip flopping back and forth that only gets your broker wealthy.

 

I think exits will always be my personal crutch - like today in oil, WTF was that? I have a signal to buy at the lod but how on Earth could I have seen that move coming? Other days that exact same thing will yield my standard 20-25 ticks of profit and promptly retrace (and usually before a short signal will trigger).

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Personally, I've done better letting profits run and just adjusting my stop/loss point manually. I tried trailing stops, but they always stopped me out before the larger move got started. I believe the old farts were right in saying that your year will be made by a few big trades that make up for all those small losers you endure. There's always a trade-off, and trading a longer time frame often requires a wider stop/loss and more patience, so if you're someone who likes action or are not willing to hold through retracements, it could be a futile strategy. With stocks I trade the weekly chart, but Forex is a different animal. I don't have the cajones for that. I used to trade very short-term charts, without much success but now have latched on to the 4hr timeframe. Maybe someday I'll trade the daily.

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Why not do both? Have a minimum target that you will feel okay closing after that is relation to your initial risk...say 2.5x your initial risk...? Knowing that you will be happy with any profit over that mark...?

 

For me it comes down to knowing what I'm looking for going in and having an overall strategy in place. I have that strategy in place because it makes money. If it makes money I keep it in place. After that it comes down to balancing the need for improvement with greed. Yes, we always want to get better, but we have to know the difference between that healthy desire and the destructive force of greed.

 

My profits are defined by my risk and my win rate as these variables are always acting upon each other. If I have a high win rate I will probably have smaller per trade profits. If I have a lower win rate I will need bigger profits and smaller risk. As someone else said, we have to find which we're most comfortable -- and realize that we can't do both for the simple reason that...

 

Knowing which trades were going to turn and which were going to reverse before that happened would mean that I could predict the future. If it were possible for me to predict the future then I would be a gazillionaire. Because I can't predict the future then I have to use the tools available to me to profit in the market. One of those tools is letting profits run. The other is closing at predetermined targets and being okay in the knowledge that some of the trades you close are going to the moon without me. Sometimes I catch those rockets, sometimes I watch them leave without me. Sometimes I close on target and watch price plummet and feel like a hero.

 

By knowing what I'm looking for I can look at any trade I'm currently in and ask: is this what I'm looking for? Are we making new highs? Is volume present? Are the consolidations healthy? If so, then the trade stays open. But...

 

If I am up over 2.5 times my initial risk I allow myself to close if I want to. Why not, right? The only thing I have to worry about is that trade skyrocketing to the moon without me on it. LOL As long as I can be okay with that happening then I'll ring the register. But....the more that I do that the more I'm reminded that I simply cannot predict the future...

 

In closing, here's a recent example. A trade I closed a couple months ago in URG. The trade opened well and after a bumpy start was off to the races. Then at +44% gain it started to faulter. Now, URG is a low priced stock and I've been trading them for a few years so I know how fickle they can be. With my initial risk at 10%, and having a 44% gain...I am happy, and close the trade. Here's the chart:

 

urg1.jpg

 

Now here's what happened after I closed:

 

urg2.jpg

 

200%+ gain. Now, I can either beat myself up or understand that if I want to get gains like this then I have to be willing to give back a lot of those early gains...or I have to be content with letting these monsters go. Or...I can shoot for both. While I've never made a 200% gain I have got plenty of 100%+ gains and I'm pretty sure it all balances out.

 

Good luck to you.

 

David John Hall

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You do not mention if you are trading stocks, options, futures or Forex - it is all different.

The same goes for the time frame that you are using - tick, minutes, intra-day, days etc.

Would you mind being a little more specific? It may help then to give an answer.

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I trade the 6B and FESX futures almost exclusively

 

Usually 30 min graphs

 

I usually go for 1:3 risk to reward ratio trades

 

When I'm feeling greedy after on a winning streak perhaps I will let it run (this is especially the case with forex futures, mainly because they are more volatile

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I've done extensive back testing of both types of exits (in TradeStation): 1: Where I set a profit target and got out, and 2: Where I let the winners run (using a moving average). The result was a wash. The amount left on the table that I would have gotten if I hadn't exited at the target, was almost exactly the same as the amount lost from trying to let the winner run past the target until it hit a moving average (tried lots of different averages). Despite the back testing however, psychologically, I'm more comfortable with letting my winners run, rather than exiting at a target. So that is how I trade. In my plan, I've recorded these statements to remind myself of the game I play:

No matter what trading plan you have, periodically, it's going to:

1. Leave money on the table.

2. Get you into a bad trade.

3. Keep you out of a good trade.

4. Miss it's target exit by a small amount and then turn into a bad trade.

Get over it and take the next trade! (From Trading in the Zone).

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I am not sure what your entry criteria are.

This is a chart I constructed for you of a 30 min GBPUSD.

Getting in would be related to the MACD_BB_HullMA composite of the BB/Keltner Squeeze.

 

Getting out is related to a few things to look at that may be of use to you.

When the Bars drift away from the BB (length set to 12) one needs to be aware that this is a pull back or a change of trend and be ready to get out.

 

In the DMI/ADX set to 11 or 9, when the ADX is pulling back particularly if it is coming down below a level of 40, it is definitely time to get out.

 

Hope that this is helpful.

5aa71055152a7_GettingInandGettingOut.jpg.c3adc360b568f49a4fe05dfe7c0e8ca5.jpg

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OP, The answer to your question – It’s system dependent. Every answer on the first page, except for Iris’s, was system dependent. Good ideas, but, unfortunately, not one answer acknowledged ‘system dependency’ or the type of system behind whether 'letting them run' or 'taking them' and a hybrid was best.

Rough examples of system dependency: In pure trend following systems, you have to let profits run – because outliers are literally the edge. In quasi-trend trading systems, you have to test it out and like others have posted – go with the best one or with the hybrid that tests out. Most swing type, etc. etc etc systems will almost always test out best to take profits instead of staying…etc. hth

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  method said:
I trade the 6B and FESX futures almost exclusively

 

Usually 30 min graphs

 

I usually go for 1:3 risk to reward ratio trades

 

When I'm feeling greedy after on a winning streak perhaps I will let it run (this is especially the case with forex futures, mainly because they are more volatile

 

I don't trade either of these, but, generally, you have to throw away small winners to get to the big winners. You'll end up with BE or losers when you could have taken a small winner and it will suck no matter how accustomed you get to doing it. Consistently trying 1:3 trades will eventually lead to break even or worse. fesx is a little short on volatility these days to trade what I am suggesting. 6E might be better suited for a large move.

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There are a couple of simplification to that question I think, because the time period is what matters. The reason why I say that is because the money management part of this, is part of the holy grail in trading. Letting your profits run and cutting your losses is no fluke given the right pivot point that you begin from only.

 

Example: If my pivot point was July 2-9 that would be consider the right time period for me to manage my money that way.

 

Livermore had pivot points and knew when the trend was turning. At a major bottom this form of money managing is best where you cut short your losers. I did this since July 9 with a paper portfolio and I am up 50% a little earlier in the year.

 

If you're going to trade and take quicker profits and not let them run would be another time period. I have to say when you know you did not buy at the bottom than revert to taking quicker profits. Like I said Livermore knew the Pivots and he couldn't calculate all the pivots as conditions change. He was always using this method when the major trend turned though.

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It sounds like overall you are doing well in your trading if you are consistently profitable.

 

Taking profit vs letting it run is a tough decision and often it seems like the day you do one the other happens and vice versa.

Here are a few things to keep in mind.

1. what type of day is it? are we trending or in a range. if we're in a range then odds favor non extension and you want to take your profits off the table.

if we're in a trending environment or if we have just made a break from a tight range then try to let your trades run.

 

2. try to incorporate some tools into your trading that give you hints that the run is over. a few suggestions... momentum divergence, wave counting (ie if wave 5 and divergence then consider exiting the trade). You might consider using lower timeframes to time you're entries/exits on the higher timeframe.

 

good luck

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