Challenging an old adage- tightening stops

[Trend Fader]

I would like to challenge the old adage that says when you have a profit you should tighten your stop. Throughout the years I went over my trades and noticed that if I would of just avoided tightening my stop I would have made more $.

Usually when the trade is going in your favor.. you want to ride it as far as possible because you know its not the little or mediocre profits that make you rich in the long run.. its those big monster trades. Why not avoid tightening stops when you have a profit, thus you bet a bigger chunk of your profits to hit a homerun.

To make things clear I am not saying you should loosen a trailing stop recklessly and give back a huge chunk of profits ... for example if you use a 2*atr trailing stop.. let it be constant throughout the trade (never tighten it).. and maybe perhaps loosen it a drop if you are up big time to try to swing for the fences with your unrealized profits.

Maybe at the end the entire idea cancels itself out.. but it my case it would have increased my performance tremendously.. I am curious to know if anyone shared the same results as myself?


--MIKE

 

[Runningbear]

Mike,

I have found that the most profitable system I've developed actually involves increasing the stop once it has given me a good profit. This allows me to risk less per trade but really ride the longer trend if Im not taken out in the first 24 hours.

Runningbear

 

[DeepHindsight]

Originally posted by Trend Fader
I would like to challenge the old adage that says when you have a profit you should tighten your stop. Throughout the years I went over my trades and noticed that if I would of just avoided tightening my stop I would have made more $.

Usually when the trade is going in your favor.. you want to ride it as far as possible because you know its not the little or mediocre profits that make you rich in the long run.. its those big monster trades. Why not avoid tightening stops when you have a profit, thus you bet a bigger chunk of your profits to hit a homerun.

To make things clear I am not saying you should loosen a trailing stop recklessly and give back a huge chunk of profits ... for example if you use a 2*atr trailing stop.. let it be constant throughout the trade (never tighten it).. and maybe perhaps loosen it a drop if you are up big time to try to swing for the fences with your unrealized profits.

Maybe at the end the entire idea cancels itself out.. but it my case it would have increased my performance tremendously.. I am curious to know if anyone shared the same results as myself?


--MIKE

Very interesting take on the subject Mike. I am currently working on a study on this trade management idea and gathering statistics along with other different management strategies. I don't have the hard facts yet but I do believe that once your trade has proven you correct directionwise it is imperative that you allow enough room for price action to breathe. Your example of a 2 ATR stop is fine as that should adjust itself during the expansionary phase of the move. However, a problem one encounters with most volatility functions is the 'lag' factor --- it may be too tight in the early going but too loose as the trend nears the end. You may want to experiment with different rates of 'ratcheting' for the ATR stop.

DeepHindSight

 

[Trend Fader]

Originally posted by Runningbear
Mike,

I have found that the most profitable system I've developed actually involves increasing the stop once it has given me a good profit. This allows me to risk less per trade but really ride the longer trend if Im not taken out in the first 24 hours.

Runningbear

I agree 100%. Decreasing the risk per trade is exactly the reason why in the long run it doesnt pay to tighten stops.



--MIKE

 

[DeepHindsight]

Originally posted by Runningbear
Mike,

I have found that the most profitable system I've developed actually involves increasing the stop once it has given me a good profit. This allows me to risk less per trade but really ride the longer trend if Im not taken out in the first 24 hours.

Runningbear

I'm not surprised something like that works so well. A good exit strategy is one that is aware of both current market conditions and current trade performance.

DH

 

[Trend Fader]

Originally posted by DeepHindsight


it may be too tight in the early going but too loose as the trend nears the end. You may want to experiment with different rates of 'ratcheting' for the ATR stop.

DeepHindSight

C'mon give me a break. Do you actually think there is a trailing stop that is perfect? Stop looking for a perfect trailing stop or exact formula there is none.. only thing there is being consistent with your exit method for a very long time.. to let your statistical edge work its way out.

"Ratcheting"?? Do you mean to say that in a specific market a 1.5 atr stop might be better than 2* atr stop.. I dont buy it... I say you just pick a number you like and use it for as long as you trade that same strategy. The difference between the 2*atr and 1.5*atr will eventually cancel itself out after houndreds of trades.. its those big winners that both would allow you to have that makes the difference.



--MIKE

 

[DeepHindsight]

C'mon give me a break. Do you actually think there is a trailing stop that is perfect?

Actually, no. There is no such thing as a holy grail whether it be entry or exit.

Stop looking for a perfect trailing stop or exact formula there is none.. only thing there is being consistent with your exit method for a very long time.. to let your statistical edge work its way out.

Agreed. Key is consistency in applying your method with positive expectancy. That being said, DIFFERENT exit methods should be applied during the appropriate market conditions (combo of targets S/R and trailing)

"Ratcheting"?? Do you mean to say that in a specific market a 1.5 atr stop might be better than 2* atr stop.. I dont buy it... I say you just pick a number you like and use it for as long as you trade that same strategy. The difference between the 2*atr and 1.5*atr will eventually cancel itself out after houndreds of trades.. its those big winners that both would allow you to have that makes the difference.

Well, I was referring to adjustment of ATR * constant during the trade not across markets. But you may be right in the long run there is no need to vary the constant at all but I would still like to see the cold hard stats

DH

 

[Trend Fader]

Originally posted by DeepHindsight


it may be too tight in the early going but too loose as the trend nears the end. You may want to experiment with different rates of 'ratcheting' for the ATR stop.

DeepHindSight

You dont need any stats just use some common logic most people dont use when they trade.

Think of it like this.. in order for you to allow more flexabiliy of not getting stopped out at the beginning of the trade you need to loosen the stop.. then in order to make sure you dont give away most of your profits when you think the trend is ending you tighten it.

This is exactly what you are implying when wrote the above.. and I am telling you that I believe using my own trading records throughout years ( sorry not available to public for obvious reasons) that this false.

You should just keep exit stop constant throughout trade.. and if the trade is going in your way big time loosen them. I guarantee you most traders do the opposite of the point I am trying to illustrate.

In trading... a lot of the money mgt techniques should be contra to convential wisdom.. because conventional wisdom has a 90% failure rate.


--MIKE

 

[Gordon Gekko]

i've thought about starting with a very tight stop.....and then loosen it more and more as it goes my way.

is this what you're saying MIKE?

 

[DeepHindsight]

You should just keep exit stop constant throughout trade.. and if the trade is going in your way big time loosen them. I guarantee you most traders do the opposite of the point I am trying to illustrate.

In trading... a lot of the money mgt techniques should be contra to convential wisdom.. because conventional wisdom has a 90% failure rate.

This is the exact problem with the 2*ATR stop you suggested. It is NOT constant throughout the trade. Assuming you enter near the start of the trend, it will be tight due to the consolidating market preceding the range expansion(not necessarily a bad thing -- it is lower risk). Then near the possible end of the trend, when it hits the first or subsequent consolidation phase it tightens too much once again. The only way i can think of offhand is to ratchet up the ATR constant so it doesn't get knocked out that easily as you have profits to work with ....

DH