The Merits of Setting Profit and Loss Targets???

[SIUYA 11]

Interesting. Maybe I'm the "less often" exception. Or, maybe I don't fully appreciate what you mean by "trend systems." I'm a short-term trader, and when I'm not looking for high probability trend reversals, I'm trying to get in early in the trend, and I use profit targets. In fact, I use a scale out approach and have more than one profit target; however, I do keep some on the table to run with no profit target. I would say that a swing trading system with a scale out approach that uses only profit targets is inferior to those that use profit targets exclusively.

 

I happen to think it's unwise to trend trade without a profit target, but I'm only an expert at what I do; I'm certainly not an expert otherwise. To me, it's like a numbers game. I expect a good many small losses, and I expect just as many small wins; they should almost cancel. My second profit target helps to make up for fees, slippage, commissions, and a little profit. The big money that comes along less is from what I let run. If it wasn't for my targets, I wouldn't be offsetting my losses, and if I didn't do that, I wouldn't be in the green on my P&L.

 

you are really trading multiple systems then, one a short term with profit targets, another with letting it run.....its a matter of accounting. Have you ever split them up to see the differences of risk return?

[TheNegotiator 13]

you are really trading multiple systems then, one a short term with profit targets, another with letting it run.....its a matter of accounting. Have you ever split them up to see the differences of risk return?

 

The scales are designed not as profit targets as such, but to reduce risk. The system is simply trying to get the most out of a directional trade while negating a good proportion of loses from trades which actually start off by getting you on side before moving against you.

[SIUYA 11]

The scales are designed not as profit targets as such, but to reduce risk. The system is simply trying to get the most out of a directional trade while negating a good proportion of loses from trades which actually start off by getting you on side before moving against you.

 

I understand the mentality behind it but the reality is if you are entering at one spot and scaling out with say one hard take profit and one let it run, its the same as having two strategies with the same entry...and you should be able to effectively separate the two to see what really works. Its more an accounting trick.

 

If you are doing a slightly different version where by say.....

buy 2, sell 1 on TP, buy 2 sell 1 on TP , buy 2, sell 1 on TP -- net long 3 - all based on building on the original trade then maybe it is one strategy, and its more discretionary then maybe.

 

If you are scaling out you are not reducing risk....you are merely limiting your upside, trading a different strategy or making yourself feel good (not necessarily a bad thing).

When you entered the trade you should have defined your risk.....this is probably where the maximum risk should be, and the easiest way to reduce that risk as you move into profit is to trail your stop.

 

If you find you are really good at picking targets, why not exit in full and then look to get back on board again......I mean how often do people go long....get it right, exit, and then re enter at a higher level, but then get cut that one....whereas the better trade was to get in once and let it ride.

 

As Zdo- used to say its all system specific....

Edited July 2, 2012 by SIUYA

[lastninja2 10]

Well said.

Altogether I think this has been a good thread and I'm please I started it.

 

Today I employed a bit of the "all in, scale out" tactic - and probably cost myself a few ticks as a result. I'm still a proponent of this strategy but I think it is important to be selective in its use, i.e. when I strongly believe we are in the midst of a trend.

 

The main draw of "all in, scale out" for me is not so much in any mathematical edge that I might gain from it (not saying there is one, or even that I feel inclined to prove one way or another if one exists, within the context of how I trade) - it's more of a psychological thing for me.

 

As SIUYA mentions, it "helps me to feel good" - and I believe in the long run my trading will benefit from that. I guess in a way, placing a trade costs me a bit of emotional capital each time... I feel a mental exertion when I pull the trigger, and I especially feel the stress when the market is trending without any nice little pull backs, and I have to just JUMP in, or else miss it all.

 

For instance, if the market is trending to the upside and I already have 1 lot long from several ticks lower, I definitely feel more calm and collected about adding additional long positions on the ride up, than if I was establishing an entirely fresh position. To some extent I think trading well is about bending your own demons to work for you, rather than against you, if that makes any sense?

 

Anyhow, that'll do from me.

[SIUYA 11]

Well said.

Altogether I think this has been a good thread and I'm please I started it.

 

Today I employed a bit of the "all in, scale out" tactic - and probably cost myself a few ticks as a result. I'm still a proponent of this strategy but I think it is important to be selective in its use, i.e. when I strongly believe we are in the midst of a trend.

 

The main draw of "all in, scale out" for me is not so much in any mathematical edge that I might gain from it (not saying there is one, or even that I feel inclined to prove one way or another if one exists, within the context of how I trade) - it's more of a psychological thing for me.

 

As SIUYA mentions, it "helps me to feel good" - and I believe in the long run my trading will benefit from that. I guess in a way, placing a trade costs me a bit of emotional capital each time... I feel a mental exertion when I pull the trigger, and I especially feel the stress when the market is trending without any nice little pull backs, and I have to just JUMP in, or else miss it all.

 

For instance, if the market is trending to the upside and I already have 1 lot long from several ticks lower, I definitely feel more calm and collected about adding additional long positions on the ride up, than if I was establishing an entirely fresh position. To some extent I think trading well is about bending your own demons to work for you, rather than against you, if that makes any sense?

 

Anyhow, that'll do from me.

 

I have been mucking around with various intra day position building, and based on my entries, and stops, I have noticed something interesting when doing some testing.

Basically - the best results are from adding to winning positions and exiting them all at the end of the day (or other various levels)....the reason being it captures those days that trend, and when it does not, you dont actually loose that much.

 

Again all system specific and not for everyone, but I also realise this is tough to mentally do as for a few reasons...

 

1....adding to positions seems hard. (it feels good to reduce and feel like you are locking profits in)

2...when you have a large position running and it starts to retrace normally people want to hit the panic button.(because of position 1)

3....not every day is a runner (but enough are in those instruments that do)

 

Hence I am working on getting the computer to do it

This system does rely on pullbacks in the trend and when you look back sometimes it runs and you dont get on.....oh well. I would rather make money than be right.

 

If you are scalping more then if running it in a similar fashion it works the same way except it just involves lots of smaller trades, but all pretty much going with the trend, and as you say lastninja - you just have to get on.

[TheNegotiator 13]

I understand the mentality behind it but the reality is if you are entering at one spot and scaling out with say one hard take profit and one let it run, its the same as having two strategies with the same entry...and you should be able to effectively separate the two to see what really works. Its more an accounting trick.

 

If you are doing a slightly different version where by say.....

buy 2, sell 1 on TP, buy 2 sell 1 on TP , buy 2, sell 1 on TP -- net long 3 - all based on building on the original trade then maybe it is one strategy, and its more discretionary then maybe.

 

If you are scaling out you are not reducing risk....you are merely limiting your upside, trading a different strategy or making yourself feel good (not necessarily a bad thing).

When you entered the trade you should have defined your risk.....this is probably where the maximum risk should be, and the easiest way to reduce that risk as you move into profit is to trail your stop.

 

If you find you are really good at picking targets, why not exit in full and then look to get back on board again......I mean how often do people go long....get it right, exit, and then re enter at a higher level, but then get cut that one....whereas the better trade was to get in once and let it ride.

 

As Zdo- used to say its all system specific....

 

Agree on the whole and would add that it also is product dependent which method you employ. Scaling does strongly help psychology. Don't agree with the statement that scaling out doesn't reduce risk. Also, if you are really good at picking targets i.e. places where the market will move to on its extreme, then your maximum 'risk' could be a tick from your TP. "Don't be a dick for a tick" is said for that very reason!!

 

(obviously when I say risk here I'm talking about MFE/MAE)

[TheNegotiator 13]

Oh yeah, the other thing I was going to point out was that by scaling you could well smooth your equity curve and hence ratchet up your size quicker. It's just one method though and probably is better for discretionary

[TheNegotiator 13]

I have been mucking around with various intra day position building, and based on my entries, and stops, I have noticed something interesting when doing some testing.

Basically - the best results are from adding to winning positions and exiting them all at the end of the day (or other various levels)....the reason being it captures those days that trend, and when it does not, you dont actually loose that much.

 

Again all system specific and not for everyone, but I also realise this is tough to mentally do as for a few reasons...

 

1....adding to positions seems hard. (it feels good to reduce and feel like you are locking profits in)

2...when you have a large position running and it starts to retrace normally people want to hit the panic button.(because of position 1)

3....not every day is a runner (but enough are in those instruments that do)

 

Hence I am working on getting the computer to do it

This system does rely on pullbacks in the trend and when you look back sometimes it runs and you dont get on.....oh well. I would rather make money than be right.

 

If you are scalping more then if running it in a similar fashion it works the same way except it just involves lots of smaller trades, but all pretty much going with the trend, and as you say lastninja - you just have to get on.

 

Again, I think this could well depend on the instrument you are trading and its current affinity to trending behaviour.

[SIUYA 11]

Again, I think this could well depend on the instrument you are trading and its current affinity to trending behaviour.

 

yes most likely but usually if you just look for instruments that are trending I am sure you would improve it....and I do think that while many instruments do mean revert, enough of them trend away from their openings, or in much the same way as TRO does it it can limit when to enter....eg; in 20 pips from the high or low, and skew it this way.

 

One of the things I have been using in the testing is range bars......that way you can quickly take into consideration the volatility of the underlying. There is a bit of subjectivity here as for how sensitive you wish to get.

eg; take the ATR of the daily, and I divide by 12 (or what ever number you like) - this should give you at least the chance of an intraday trend.

This also gives you an easy measure for a....how far a stop maybe from your entry, as everything becomes relative, and b...gives you an idea as to how far a trend may occur in the day.

(at least the theory and ideas are working so far)

 

If you follow the Electronic local its not that different - wait for the trend, get on board....I guess i pyramid a bit harder in the testing.

[fast 10]

you are really trading multiple systems then, one a short term with profit targets, another with letting it run.....its a matter of accounting. Have you ever split them up to see the differences of risk return?

 

My first exit (usually about a 1:1 R/R relationship +/- a little) set a few ticks before my first run-in with major resistance is purely and for no other purpose than to substantially adjust my cost-basis in the trade. My short-term goal is to mitigate loss, or keep losses small, as people like to say. I take off half of my position at that point. Losing money and failing to gain money may occasionally net the same, but I'd much rather fail to produce possible gains than loss actual gains. All these trades are merely foreplay for what's to occasionally come later. For the most part, I'm just trading away making a little and losing a little. That's fine; it's supposed to approximately cancel.

 

My second exit (usually about a 2:1 R/R relationship) set a few ticks before my second run-in with major resistance is to provide a solid foundation. All that foreplay keeps me in the market long enough for me to actually see some actual trend continuations. This is where my intention is to see some green. Not much. Just a little. I just want to cover all my expenses. I want everything that has gone wrong before to be offset by this achievement. It happens, and it happens quite often. Not as often as earlier, but often enough to make sure I stay in the game. At exit two, I sell half of what I have left. So, I'm left with only 25% of what I started with.

 

Those two exits are specific targets that I'm keenly aware of even before I pull the trigger to buy. I don't know that I'll reach my second target anymore than I know if I'll reach my first target, but I know where they'll be if I get there. I often do. The first more often than the second, but it happens, and it happens enough.

 

The third exit, well, that's why I truly entered the trade to begin with. I've simply tinkered along with little losses and little wins, and I've made some decent wins and some more little losses. At this point, I'll employ any number of trailing stops of my choosing to catch those few times here and there that'll I'll wind up riding an extended trend, and if I'm extremely lucky, I'll catch a megatrend once in a blue.

 

I don’t see it as separate systems. I see it as a single system with different parts.

[Predictor 11]

Fast... when using scale out exit you should tend to get the average of the scale out but you will take a loss on all contracts when wrong. I say use it if it works for you but mathematically there is no edge to scaling out. There is no cost either, really. This averaging process once understood can also seen in volume/price relationships.... Many successful traders like to add versus scale out.

[fast 10]

Fast... when using scale out exit you should tend to get the average of the scale out but you will take a loss on all contracts when wrong. I say use it if it works for you but mathematically there is no edge to scaling out. There is no cost either, really. This averaging process once understood can also seen in volume/price relationships.... Many successful traders like to add versus scale out.

 

All my targeted exits are actual exits when reached, but not all actual exits are at my stop loss when targets are missed. For example, if I get a strong signal that price is about to go into a retrace, I'll exit my trade early thereby limiting my loss. A target is just that, a target. I'm not going stay in a trade and just allow my stops to take me out when I have clear signals that my stops are about to be in the line of fire. Don't get me wrong. I don't micromanage either. If I don't get a strong signal to get out, I'll give my trade plenty of room to move otherwise; hence, I never do silly things like moving my stop loss to break even. If my setup is still valid and all signs are a go, I'll let the price fall all the way down one tick past the cycle low (well, one tick past what I thought was, but isn’t, the cycle low). I'll get out then for sure, for if I'm wrong, I have no business being in the trade. Also, I only take high probability trades when at least nearly all signals point in the direction of my trade. I'll sit and let good trades go by one after another. I only want the cream of the crop, so I have to be patient and wait for them. ((ideally anyway))

 

I never scale in. With each successive wave comes a decrease in probability that a trend will continue. That's not to say there aren't successful traders who do. I don't know either way. I would imagine that you're right.

[SIUYA 11]

Hi Fast, Predictor is saying the same thing I am I think, and the Neg nails it - a lot is about smoothing the equity curve.

You still should be able to separate out 'as if they are different strategies' - even if you dont view them as such, and be able to work out how well each individual strategy works....thats all.

 

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Plus a chart might better explain what you are saying....i thought it confusing when i read

"My first exit (usually about a 1:1 R/R relationship +/- a little) set a few ticks before my first run-in with major resistance" and then

"My second exit (usually about a 2:1 R/R relationship) set a few ticks before my second run-in with major resistance"

 

I assume it is a different resistance, plus for me, going long into resistance seems a low probability trade - maybe I just have a different picture in my head.

 

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I had a chuckle at this one - and this is what makes a market....when you said

"With each successive wave comes a decrease in probability that a trend will continue"

for me....

"With each successive wave comes an increase in probability that a trend will continue"

 

strategy specific..... (Zdo)

[fast 10]

Hi Fast, Predictor is saying the same thing I am I think, and the Neg nails it - a lot is about smoothing the equity curve.

You still should be able to separate out 'as if they are different strategies' - even if you dont view them as such, and be able to work out how well each individual strategy works....thats all.

I'm not sure I understand. I suppose one could examine the actual gains and losses for each exit as if (as if, you say) there are multiple strategies to my style of trading, but taking a second exit is a function of whether or not a first exit was taken, and I never know how for sure how far any given trade will go, so it's not like I can pick and choose between the different purported strategies where each successive exit might be viewed as a separate and individual strategy. I am open to the possibility that I'm missing the point.

 

Plus a chart might better explain what you are saying....i thought it confusing when i read

 

"My first exit (usually about a 1:1 R/R relationship +/- a little) set a few ticks before my first run-in with major resistance" and then

 

"My second exit (usually about a 2:1 R/R relationship) set a few ticks before my second run-in with major resistance"

 

If my cycle low is $10.01, and if my entry is $10.15, then my stop loss is at $10.00; therefore, my risk in the trade will be $0.15. In order to have a reward equal to my risk (i.e. a 1:1 R/R relationship), my first target would be $10.30. However, let's say the 200SMA is at 10.38 and there are no other obvious resistance levels between my entry and the 200SMA. In that case, my first target might very well be $10.35 (three ticks below the 200SMA). And remember, this is still just a target; I might still get out if my cycle indicator turns against me.

 

If, however, there is another resistance level (oh say) a previous cycle high at $10.32, then my first target may likely be $10.29, and that will give me a R/R ratio of a smidgen under 1:1. I will usually go about 25% one way or the other when taking my first exit, but getting half my money off the table at that exit is a high priority. This has to do with neither fear nor greed. I only want to substantially adjust my risk in the trade.

 

I assume it is a different resistance, plus for me, going long into resistance seems a low probability trade - maybe I just have a different picture in my head.

You're right, going long into (and remember, you said, "into") resistance isn't what I'd call a high probability scenario either, but there's some things to keep in mind. There is a mine field of varying support and resistance zones--some are weak, some are strong, and some aren't even seen by everyone. All these barriers to price movement are, however, penetrated, and if they weren't, we'd never even see a trend. Consider my earlier example with the 200 SMA hanging overhead. I'm not holding into nor through that resistance on my first exit. I'm getting out before that point, so I'm not buying into resistance. Buying into resistance (when going long) would be being triggered into a trade very near and underneath that zone.

 

I only enter trades when I have a lot of strength behind the trend. There are other factors as well, but that's one element (and particularly important at this juncture in this conversation) that goes into my buying decision. I realize there will be some buying pressure causing price to fluctuate over the very short term when in the territory of these zones, but if all my signals are still a go, I hold my position in the trade until such time I'm signaled to bail. So, in one sense, you're right. I am buying into resistance in so far as my trade may eventually take me through a variety of resistance zones, but it's impossible to buy such that great gains can be made without breaking through a myriad of resistance zones. One particular resistance zone that I always take heed to are cycle highs (and especially odd numbered waves when going long). There are a variety of support and resistance levels I pay attention to.

 

I had a chuckle at this one - and this is what makes a market....when you said

"With each successive wave comes a decrease in probability that a trend will continue"

for me....

"With each successive wave comes an increase in probability that a trend will continue"

 

strategy specific..... (Zdo)

I have no idea why you would think this is strategy specific. Of course, I still have a lot to learn. The statement I made wasn't made lightly. I have a lot of confidence in what I said.

 

One of the fundamental cycles of the market is that of an alternation between trending and not trending. Stocks will trend for a while. Then, they will not trend. Consider a stock that is in an uptrend. It won't hold its trend indefinitely. It may move into consolidation for awhile (which some mistakenly regard as a stock that is trending sideways). Next, the stock may continue another uptrend, or it might begin a downtrend. This holds true on all common timeframes.

 

The point I'm making is that there are trend beginnings and trend endings, and some last longer than others. In fact, a careful and exhaustive review of the actual number of waves in a trend can be counted and therefore averaged. I'm not saying I've done that, but there are an average number of waves. The number may change slightly depending on the actual mechanics of how one chooses to count them, but given any single set of criteria, they can be objectively counted.

 

In fact, I count them all the time. I look at cycle lows and cycle highs, and I look at waves. Every wave is a cycle, but not every cycle is a wave. The point of counting waves only serves to pinpoint where the current price of a stock is in relation to the current structure of the market. If I'm at wave number 2, there is a very good chance I'll make it to wave 5--because 5 is the average given how I count them. If I'm at wave 2, there is an excellent chance I'll make it to wave 3. The reason is because I'd be in a developing trend, and they tend to develop more than those that don’t, and I know this because I know the average is 5. Now, let's say I'm at wave 7. Well, that means I'm in an overextended trend. Can it make it to wave 8 or 10? Yes, but the odds are not on my side because I'm no longer in what is usually a developing trend. In fact, if I'm at wave 7 or 9, then not only is there a very low probability that the trend will continue, there's more of a chance for a reversal than a continuation. That’s not to say I haven’t seen megatrends, but they are relatively few and far between. I could trade them, but the odds wouldn’t be on my side.

 

PS: I wasn’t talking about Elliot waves.

 

Anyway, I don't think I should derail this thread any further. Nice chattin' wid ya.

[SIUYA 11]

I dont think this has derailed the thread - its perfectly on line - talk about stops and profit targets , plus always happy to discuss almost anything....

 

I'm not sure I understand. I suppose one could examine the actual gains and losses for each exit as if (as if, you say) there are multiple strategies to my style of trading, but taking a second exit is a function of whether or not a first exit was taken,

 

that is it. You can actually look at the stats of each exit and see how often they are hit.....it can tell you if its often better to take everything off at the first time, or maybe its even better to let everything run.....its purely an accounting measure that allows you to cut and dice what you do a bit more.

When you talk about taking half off quickly then lets say you are buying 3 contracts all in at the entry, with three separate rules for taking profits.....then in fact you have three separate strategies

 

You're right, going long into (and remember, you said, "into") resistance isn't what I'd call a high probability scenario either, but there's some things to keep in mind. There is a mine field of varying support and resistance zones--some are weak, some are strong, and some aren't even seen by everyone. All these barriers to price movement are, however, penetrated, and if they weren't, we'd never even see a trend. Consider my earlier example with the 200 SMA hanging overhead. I'm not holding into nor through that resistance on my first exit. I'm getting out before that point, so I'm not buying into resistance. Buying into resistance (when going long) would be being triggered into a trade very near and underneath that zone.

 

Yes...there is resistance every time there is a seller, and i understand we are talking about "significant expected" resistance, However.....in your example it sounds like you are on the 2nd and 3rd exits......and hence the question about chopping it up into separate strategies and seeing the results....

 

It does sound like you are buying 3 contracts in a rising market, taking profit on 1 maybe 2 into resistance and letting the last run for a possible breakout. This last one having the advantage that it was purchased prior the breakout and may not be shaken out on any small retracement at and around the resistance..

A far better way of playing breakouts maybe.

 

 

I have no idea why you would think this is strategy specific. Of course, I still have a lot to learn. The statement I made wasn't made lightly. I have a lot of confidence in what I said.

 

Zdo (i think he is currently golfing) - it was one of his great sayings..and its true. Your strategy and my strategy may have the exact same entries, but the profit targets are different....it basically says, comparing strategies and saying this is an absolute truth is pointless.

You may have all the confidence in the world...so may i - our trend time frames may be different - and yes you are right in how it works, but time frames are important (remember the 1987 crash - merely a blip on a chart now)- that is all.

You may be looking for smaller profits with more rentries, or closer TP on the first two contracts and letting the last run, while I may sell 1 contract and run 2....

strategy specific.

 

and we definitely agree regards where things are in context - i call them marginal trades. They are those that you enter a long in the equivalent of wave 9 - trying to capture the last bit of a wave, when you think its already near the high as per your average.. (I dont count as such but use visual cues)....however, a scalper might not care - strategy specific.

 

All in all for me in trying to do the computer automation shows how much a difference it can make.....last night i ran a test on an idea......the longs made money, the shorts did not and this is in an instrument that was in a downtrend, and the entry was effectively the same (only inverse) - a lot had to do with modifying TP levels. The computer however is binary compared to humans and discretion.....interesting more than anything unless you want to curve fit too much.