Letting profits run

Moved to it's own thread on suggestion... closed the clinic for a while just in case anyone is posting in reply to this.

Let your winners run.

This saying is bartered about like some kind of wise words from above - cut your losses and let you winners run.

I think that most of us in the 1KT know about cutting losses - that's the easy bit, hell if we dont then we go broke right? Or do we?

BUT 'let your profits run' is harped on by almost every guru and book writer on the planet - unfortunately they never answer the inevitable question that follows "how far?"

How far is letting a profit run? if you allow a 1 pip trade to go to 2 pips you've let it run. if you let a 10 pip trade go to 500 you've let it run - when exactly is enough?

To give some background to differing opinions before the floodgates of posts follow, please allow me to present some popular opinions and their reasoning behind them.

1. trade it till it's dead - in this scenario you take a trend trade and then stay in the trade until the trend shows it has broken - ie the sequence of higher lows has been broken in an uptrend or the lower highs are broken in a downtrend.

I myself carried an experiment out in 2005 regarding this issue. what i did was produce a spreadsheet with every trade i took in it. for each trade there was what the actual trade made if left till the trend broke and what the result would have been had you taken 10, 20, 30 etc pips on each trade - this went all the way up to 200 pips (i was trading 5 and 15 min charts at the time)

the object of the sheet was to calculate my ideal take profit - so for example if at 70 pips take profit it made more money than at 80 then 70 would be best.

After 150 trades it was time to assess the results and they really suprised me.

what i thought would happen was that as most of my trades did not go father than 50 pips that the ideal take profit would be somewhere between 30 and 50 pips - that taking say 50 would pay for the big runners that i would miss because id get 50 instead of say 20 when the trend had broken.

even though the vast majority of my trades went a maximum of 50 pips ish and they probarbly closed at +20 or less as predicted there were a few trades that went much more even to almost 200 - they were not regular but they had to be factored in.

after 150 trades the results were in - the best take profit, from an account gain perspective was .... no take profit!, just close at the trend end!

This really kind of blew my mind - even though on the majority of my trades i was giving back sometimes 50% or more of the move it still made more money than taking a set value. - the runners paid for the lost retraces and then some. - the differences weren't small either they were large.

The problem with leaving the trades on the table are obvious - psychologically most of the time you feel like you are giving pips back.

2. Take Profits regularly and let the losers run.

This is a dirk de toit kind of standpoint from bird watching in lion country - although letting the losers run forever is not the idea as I will explain.

Basically in this strategy you decide on the underlying trend using fundamentals OR longer term charts (after all they tell you where the trend is not where the fundies say it should be)

you then identify a place on the longer term charts where you will class the trend as broken and that's where all your stops will be - you are going to trade in one direction only.

so you decide the trend is long so you are only going to trade long and your chosen method is to buy dips.

each time you take a trade you look for profits that you are comfortable with, say 40 pips in the case of Mr du-toit. if the dip was not really a dip you leave the trade in because chances are price will come back anyway with the prevailing trend. you buy the next dip again and just leave trade 1 there - trade 2 you again take your 40 pips etc. all with low leverage of course.

you carry on buying these dips and treating each trade as an individual trade taking profit everytime. The losing trades are only closed when the underlying trend is changed by either fundamental means or whatever method you have chosen.

The plus side of this method is that because you are always with the underlying trend you get a lot of winners - even if sometimes you have to wait for them - Dirk claims around 85% and others back up this figure so i have no reason to doubt them.

the downside is that when you do have to close losers because the trend changes they are larger than the winners, often several hundred pips and that is when the drawdowns happen.

the theory is that you have lots of wins and the wins make more than the large losers.

3. Reduction take profits.

The third one to cover is where you close say half the position at specified levels and let the rest run.

Van tharp in his books says this is folly and you would always make more money by leaving the whole position in - and i'm sure that this is true but i can't comment on it as ive never done it.

Discussion:

Although we look at the market scientifically there is also the psychological aspects of trading. Im sure than those who follow Dirk's method of 85% winners feel much better MOST OF THE TIME that do those who trade looking for the big one who only win say 35% of the time.

There are many ways of looking at this and i'm sure all have some relevance, however more than anything, as an active trader and money manager I have to not only rely on cold maths and physics, but also on my emotinal well being.

which is harder - having a w/l of say 35% which produces drawdowns regularly or having an 85% w/l which produces drawdowns much less regularly but when they do they are large and take longer to get out of?

i can tell you that the 35% method produces drawdowns in about2-3 weeks and then they come out of those drawdowns spectacularly fast, like in 2 days or so to new highs.

im guessing that the other method produces them the other way around - a hard drawdown in a day or so that then takes 2-3 weeks to pull out of.

The way I have traditionally traded has been the 35% W/L way and I can now suffer some very hard drawdowns without it bothering me too much as I know how they turn around.

To be good at this I had to mentally condition myself that if i took money off the table before a trade was over that i did a bad thing - even if it made money. I made it hurt when i took 50 pips and the trend went to 200.

what i would really like to know is that those who take money at set pip levels, say 30 pips or whatever, how do you mentally train yourself NOT to kick your ass really hard when those trades go on another few hundred pips or so without you on board?

also interested in other views on taking profits or cutting losers etc but please try and keep the topic fresh and not just saying 'this is what i do' - tell us why and how you control the mental downside to your strategy (every way has a downside)

There, floor is open!

Great post, I enter a trade on the 4hr let it run, then only close it based off of the daily. (after running good on the 4hr, it will show up on the daily) Buffet says it best "buy and hold". He's not sucessful because he is lucky. Luck is only good things that happen to unprepaired people.
I cant believe how many times I've been holding positions still making pips, still making bull candles and someone says I'm short here because of a bear candle on the 15min chart. :surprised

I actually traded the BWILC way when I first started.(made heaps, then went on to blow up most of it merrily.....and yes, having stops hit eventually does end up a lot more painful with this approach)

As for the other "idea":
I find the hard part about the exit optimization is knowing when a trend is over.

=> your AUDUSD 4h chart is a good example. You declared it over in that post and now we are making new highs. Ya know?

I completely agree with the letting things run idea however. All those people who keep going on about how they are SO good they can trade every 5 pip retrace and make 5 times as much trading every jitter and jerk in the market just cause me to shake my head

I still believe "knowing" where retraces end instead of marking a "no lower else trend is over" line and then treating the few thousand pip wide area above as "bargain, not so much bargain, expensive" areas might take a lot more skill, but it does avoid the certain amount of randomness you get from the BWILC approach..let alone what it does to MM(you either only get to buy TINY amounts...or you overleverage yourself to no end).

It's a bit surgical strike vs cluster bomb.

Also I have found I am by now basically completely unfit to see red on any trade for a prolonged period of time.
My head and emotions don't cope well.
So I need a system that has "setup, trade, result(as in either I am wrong=stopped, or I am right = black pips)" within a day or two...and exiting, well, meh...no need to leave as long as the party is strong. There's several ways you could decide whether the trend is "active" or lethargic, but I think that'll just bloat things here.

Precise entries and lax exits(need a sign of reversal or the passing of a "threshold") is what I tend to do I guess

As for reduced take profits:
I think it is a pitfall that's mostly to blame on the "need to have secured SOMETHING" fear in a trader again. I do think the math says closing out all or nothing is the smart way to do it and thinking/feeling one thing is smarter(chopped up exits) and proving yourself the other(more MONEY from full exit only) is is the hard part I guess..

I have a buy the retrace, take the profit style that gives 70% plus winning trades and rarely has a losing day (5-10 traders per day). Target is bigger than Stop and I rarely tighten the stop as I don't like the frequency with which a BE stop will take me out before I reach my target.

How do you condition yourself?
- it feels good to take the profit then you just wait for the next setup
- it is very relaxing to almost always be profitable and to have a very few losing days that are actually smaller than your winners are big.
- it doesn't take too long to convince yourself that chasing the end of the trend is greedy and who needs the pain that comes with greed.

- those 200s of yours are not frequent and the chances are I'd get a couple of chops at it - when I don't I just remind myself that not every market movement fits my strategy - no probs

That's the thinking more or less.


Re Van Tharp --- IMHO he's not as good as he thinks he is! Sure its not optimal but I'm not trading to make the MOST money possible (thats just greed or perfectionism (or ivory tower sell more courses thinking)). We trade for fun and money surely?

got to say that's the first time ive ever heard that one BRW - most ones ive heard say they take the 4 hour and close based on a LOWER tf trendbreak - thanks for opening my mind to look at something new!

that trend was over, well it was if you class a trend as higher lows. then a new trend began with a higher low around the 102 marker and is still running - not that i'm in it, i was in at 101.60 and closed at 105.5 when the 30 min showed signs of ending - had chance to get back in but was already into audchf and i do limit the number of trades per pair when in 'long in the tooth' territory.

Interesting, especially how youve gone from the de-toit to a hard stop / precise entry kinda thing. i'm inbetween the two camps thinking that my entries are fairly precise (within 20 pips) but that if the dip isnt a dip then i will hold it for a good distance. but then I do use low leverage of 1:1 so it's comfortable.

also agree on your van tharp comment - was hoping someone would catch on that trading isnt always about maximising.

Not sure about the fun bit though, it's just a job after so many years - albeit well paid.

im interested in hearing more from others who use a take whats on the table approach - bird in the hand is worth two in the bush kinda thing.

see, when conditions are ideal I will hold em forever, however when they arent I will daytrade on the 30 min or 1hr - trouble is i have a problem shifting my thinking from 'hold the bas^&%$d till it's dead' of my long term trades to 'take the dosh' on shorter ones.

Im working on being schizophrenic i guess!!

just so you know by the way - the 200's were years ago - most trades on my swings are now average about 400 pips and some much more, but in the context we were speaking about i get your point

Just so I don't appear to be a target bigot

I like the enter on 4 hour, exit on daily idea. I'd extend it by saying "wait for a daily support/resistance or daily trend then enter on 4 hour" before exiting on daily. In that case I'd see the 4 hour chart as fine tuning the entry and stop for a daily trade (imho )

I also like the idea of taking a trade; taking half at target and then trailing stops behind trend reversal points for the other half. The target half can be reentered if a new setup occurs.

Finally, I trade indexes not currencies at present because my day is the asian day and currencies are not at their best then. I used to trade HSI and currently trade SPI, Taiwan, and Nikkei - on these I would trail a stop on SPI, go half and half on STW and always take the target on N225. That reflects the trendiness of the markets.

On currencies I would probably go half and half and trade 3-6 pairs (but only ever twice in the same direction for any half) because I enjoy being paid every day.

I'm in the trade until it's dead category. I don't believe that it is our job to guess when a trend will be over. This is exactly why I detest profit targets in most cases.

When evaluating a position I look at stop loss location and risk before anything else. Then I look at reward. This is the opposite of a new trader who immediately starts fantasizing about how many pips are going to rain down upon him. If I reasonably believe that the trade can make 1:1 then I take advantage of the edge I have and execute that trade. I think the worst thing you can do is have a target. The market doesn't give a crap about your targets and you should not be satisfied that price has touched some fictitious line that you drew on your chart.

Most traders forget risk:reward once they are in a trade but it should be in your thought process during every decision. Let's suppose you position is +75 and price hits your magic fib or pivot line. Do you take profit? Why not risk 25 of those pips and see if the market moves another 75 in your direction? The point is that risk:reward should be part of your though process every time you glance at a potential or current position.

The other way to stay in a trade is to stop watching your damn charts so often. You can not influence the market by staring at the screen. There are two ways for the market to make you exit against your will: Scare you or Bore you. Whether you like it or not, every time you stare at the chart or your account you subconsciously make the decision to stay or go (flight or fight). It's not your fault, it's a holdover from our caveman days. The best way to avoid this decision is to not look. Ironically, many find it easy to not look when they are in a losing trade in an effort to avoid pain. You should condition yourself to have the same response to winning positions.

One last thing. Soultrader is right and my test results are similar to his. It only takes a small fraction of your trades to turn into big winners to have a really good year. His work is similar to ATR studies that I have done. The market, on average does not move 1 ATR per day, it's moves 0.8 ATR. It's that rare 2 or 3 ATR day that makes it average out to 1.0. Big winners pay for a lot of little mistakes. You could catch as little as 1 trend a quarter and have a very nice year.

If you can't hold winners then you should ask yourself why you are trading. Don't kid yourself and say crap like "I don't want to get greedy" or "I only want the middle of the pie." You need those winners to pay off your losers and hopefully have some left over for groceries. You owe it to yourself, your family, your cat or anyone else who depends upon you to take the maximum amount possible from someone less fortunate than you. It requires no more effort to hold a trade. There is one click to get in and one to get out.

There is a reason that the 'big winner' logic is incorrect and I'll try to expound on it tomorrow or in the weekend - but I thought I'd give you guys a hint

Its money management, risk or ruin, and the affect of the statistical distribution of wins and losses. All the discussion about trade strategies here has an unspoken assumption that you can and should risk the same amount no matter what distribution of wins and losses you have. If the amount you should risk changes then the profitability of the strategies changes too.

But that assumption is very wrong. You can take much bigger risks on a strategy with a high win rate and and even distribution of wins and losses than a low win rate trend chasing till its dead strategy while maintaining the same risk of ruin. So maybe a 35% trend follower can risk 2% per trade with a 2% risk of ruin over 500 trades ---- but a 70% target taker can risk 5% per trade with the same 2% risk of ruin over 500 trades.

I shall try to prove it later probably with some simple examples and pointers to more advanced money management information.

I posted this thread in the early days and stopped taking profits early from that moment based on most of the replies I got. http://www.forexfactory.com/showthread.php?t=12273

What I do now is pick obvious S/R target areas and/or Fib Expansions based generally on 4hr/Daily charts. Very occasionally I'll close say 4 lots from a 5 lot trade and trail the last lot to see if I can pick up some extra money as price tries to break out. But this would be the exception to the rule. If I lose pips 'cos the run doesn't end at my TP target, I shrug my shoulders and say NEXT. I've found though that, in these circumstances, I tend to trail quite tight so it was usually a waste of time anyway.

Don't forget the details on the strategy itself

posted on behalf of a non 1kt reader - thought it was good - someone vouch for this guy



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Hi ST -

The issues you raise are very much to my liking and I will try to answer as precise as I can taking into account that it comes purely from studies about myself in relation to human behavioural patterns.

This requires a great deal of "outside the box" thinking as you have posted in your previous thread.

First of all I (as a human being) have to acknowledge the fact that I am genetically pre-conditioned for pattern recognition, which does not work in my favour in trading. Because of this pre-condition, the human perception sometimes automatically "sees" a pattern where there isn't one. The reason for this condition lies in the fact that humans who could spot a pattern such as the stripes of a tiger in the jungle had more chance of survival than the ones who wouldn't. (The human being is essentially seeking out a pattern even if there is none, in favour to not seeking out a pattern and failing to spot the tiger).

In my trading, it takes a very conscious approach to distinct between a valid pattern and a pattern that I simply want to see.

The next point which presented a solution for the emotional difficulties I encountered in my trading lies in the perceived randomness and the application of the law of probabilities.

The calculus of probability has been introduced to formalize randomness and one theory (Bayesian) appears to be much more closely related to how people intuitively reason in the presence of uncertainty. (which in practise is what a lot of traders do from the moment they enter a trade - trying to reason the uncertain outcome of the trade)

LaPlace said in 1951: "Randomness is either a euphemism for ignorance, or the expression of the limits of human perception and knowledge".

I will try to cut this short - from the above said, what knowledge can I derive and how can it be useful to me as a trader?

1. In whichever way I look at prices in the market, by way of a chart with or without indicators, with or without a belief, I CANNOT influence the price movement; it is out of my control no matter how many patterns I have seen in the past or how well a dozen indicators prove a past price movement very accurately.

2. The second factor which is beyond my control (and beyond every traders' for that matter) is the payoff of any given trade. No matter what your expected value on a trade might be, it is certainly not in my power to control that value.

That leaves the all important question for any trader: what can I do in the presence of such uncertainties? Or better, what can I control?

The answer is simple really: RISK can be controlled. In other words, you can control your exposure to the uncertainties. You do it through applied mathematics, namely position sizing and money management. (numbers don't lie - if you want to find out, create a sample series with a fixed bet size versus a fixed fraction bet size)

Returning now to answer part of the psychological question: I take an analogy from my school days: the biggest stomach churners occurred when I turned up to a math exam unprepared, not knowing how to solve the equations, facing uncertainty. To solve that problem, I learned my equations and those were the weapon against uncertainty - and those are the weapon now in my trading. I can face the uncertainty of the price movement by knowing how to calculate and manage risk as per existing formulas available to anyone who cares to learn them.

This is only a fraction of the subject but hopefully the essence of it has become clearer.

I'd be happy for you to post it and hope I have not taken up too much of your time.

Thanks ST, for the start of a valuable thread.

regards
daytrading
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I think he should at least post more than none before vouching. He has no posts. I agree about your assessment of him though. That was a remarkable essay he/she wrote. I hope he/she does post in the future.

sometimes one post is all it takes to show you are worth 1kt status - ive spoke to this guy for a few weeks now and he is certainly worth it but a bit reclusive as some traders are.

give him your vote and lets bring him out of the shadows, it's clear as day he is 1kt http://www.forexfactory.com/member.php?u=49186

You convinced me... LOL

excellent points Phil, and i do identify with a lot in your post.

Though this post did make me think that there is another way of doing things, particularly after the de-toit book.

As a trend trader like you, i have rapid account highs like when the sub prime first hit and then ages with nothing, break even or drawdown - these periods last a good while and if not strongly convinced in your methodology you can be shaken into thinking "this is no good anymore, maybe i was lucky" - then out of nowhere comes a mega move which places your faith well and truly back in your method - the cycle them repeats as does your emotional state.

It's hard being this kind of trend trader because when in a drawdown it's very easy to think i'll reduce leverage, not take so many etc etc - and then of course the big one comes on many pairs, you may be in a couple of them but this time underleveraged and the big win is lost to your account. This happens a lot until you are really sure of your method, and even then i get the collywobbles sometimes - you?

There must be the other side also, just by looking at steviet's thread you can see how this works - he thinks he trades the 5 min charts but in reality he doesnt as he only uses it for entry and then holds the losers forever with a 1000 pip stop. that's not a 5 min daytrader. he then takes profit at 10 or 20 pips everytime and has seemingly miraculous runs of wins. ps, steviet this isnt personal, just analysis

but this way is valid also - unlike us these traders have long periods of feeling good whilst the sun shines, sure they have some bubbling losers which make them sweat a bit but overall they are closing winners daily.

when the hit comes of the losers which will of course happen they will feel terrible for maybe a week or two and will take ages to crawl back wheras we feel crap for weeks and great for a few days at new account highs.

Both approaches make money and i suppose it's down to the individual as to which approach they are comfortable with - I guess there is a lot to be said for feeling good 9 months of the year as opposed to just three (compounded days of course) but then that added confidence might cause more risk taking wheras we trend followers are a bit more conservative because of the 'oh shit another loser' factor.

Must admit i'm intruigued as to how it feels to do the latter. I did do some mean reversion at one time and had about 120 wins in a row before i got hit - trouble was the hit took the 120 wins and more away in one fell swoop lol. money management wasnt the best strategy i think!

Scott, hi -

I do appreciate the apprehension when vouching for an "unknown" - In fact, this happened all upon replying to two very interesting (for me) threads started by Soutrader and his subsequent suggestion for me to become a member with 1k status.

I would like to take the opportunity to thank you, Philmcgrew and Soultrader in particular for inviting me to post here.

While contributing here, I will do my part in upholding a high standard and hope that my (rare) input will be beneficial to readers in one way or another.

regards
daytrading

Welcome DT - hopefully we can provide enough subject matter to irk your input more often than you think

If you're not controversial you're not trying. Welcome.

I belong to the let it run group as the smarter I think I am the dumber the mistakes i make.. If I do this that and this and that I'll win.. Yea right..

the more decisions you make once in the better chance of the micromanaging thing.. or the famous mental block thingy