Profit Taking Strategy

[man]

traderfader
there was a discussion taking place 'couple of weeks ago on the relationship of hitratio and profitfactor. acrary was in the center of that. I do not know whether you were there or not, so forget this if you were.

I agree with a previous poster that it is in any case superior to have a target, let us say 30 cents and wait until price hits above that and move trailing a take profit stop up there instead of going out at 30. assuming we are talking liquid stocks that does not include substantial risk but offers more opportunity to increase the profit factor.


peace

 

[ChrisM]

Quote from JT47319:

When you decide to cash in, what is your method and why? The two most common I've seen is either the half and half where you lock in your profit once you reach your price target and let the rest ride. Or the all or nothing method, selling at the near top (or what you think is the near top)...

...I know Pristine and others suggest the 1/2 method, but the trading books I've read by Dr. Alexander Elder suggest that this method is not the most optimal. As I am still quite new to trading, I'd like everyone's philosophy on this.

There is no easy answer to this question and I would not recommend any mechanical approach to this concept. In fact managing losses seem to be ironically easier to manage then open profits.
Try to calculate profits as multiplier of volatility i.e. average true range. You should get your results improved, but generally speaking no matter what move you`re in, get ready to cut only some portion of it. The rest is the price of letting the profits grow.

 

[AAAintheBeltway]

alfonso,

Very good explanation and approach and I pretty much agree with everything you say. I've never been a big fan of trailing stops because you are always exiting on a pullback. I'm not a big fan of targets either because you never know how far a move might go. And I really hate giving back a lot of open profits. So you have to find some compromise in that.

I think there are three basic rules that help. One, once you've cleared your entry price, never let it go to a loss. Two, try to exit on a pattern failure or reversal or exhaustion signal. Three, if you miss two, then use something similar to a parabolic trail to ensure against giving too much back.

 

[Swish]

Interestingly enough, I've been spending some serious time this week in pursuit of testing my exit strategies. Like an earlier poster, I had believed that capturing a small profit early on was a good thing because it lowered my exposure per trade, which I thought would increase my risk/reward ratio. This week (and last) I've generated a maze of spreadsheets with historical data for a basket of stocks that would have been targets for one of my trading strategies. I can manually adjust the target multiple (based on stop-entry spreads) and how much I take out at each target (ie - 25% of position, 50% of position, etc). I did this for different market periods (ie - trending up market, trending down market, and sideways market).

My strategies are intraday, but not scalps. Typical hold times for gainers are 2-4 hours. You more experienced guys probably would not be surprised by what I discovered, but I was:

Rarely did the early exit strategy improve overall results. Taking profits at 25c consistently was worse than waiting to take the first 1/4 at 1x stop spread. For me, this has been a real eye opener, and I've gone through a fairly significant change of opinion in the past week over this issue......

And now come to find out most of you guys already knew this!!!

 

[Arnie]

Interesting thread. Its amazing how little consideration this subject gets. When I first started trading, all I thought about was my entry. It did not take long to realize that my exit was just as, if not more, important than my entry. If you're scalping I think you need to put on your whole position at once or very nearly so. As opposed to scaling into a swing or position trade. Once in a good trade, you ride as much as you can by locking in an early profit and letting say a third of it ride. Scale out on the price spikes.

 

[lindq]

Assuming that you are long in the trade, my experience and all my backtesting indicate that you should at least wait until the end of the bar to close the trade, no matter what exit system you are using. The logic here...and the reality...is that more often than not strength will continue into the close of the bar. This is a real patience exercise, but worth the wait.

 

[pretzel]

Quote from AAAintheBeltway:

I tried to backtest this several years ago on the S&P futures and found that the best results with my entry came with an all or nothing approach. I think that conclusion would apply even more forcefully today if you are trading globex, because it is so easy to get in and out.

It is tempting to take quick profits on a portion but you are violating one of the cardinal rules of trading: let your profits run and cut your losses quickly. In other words, you will take stop outs with the full position but take profits on only a partial position.

I can see why a position trader, particularly one carrying large positions, would want to scale in and out, but I am talking about daytrading. Personally I don't like having to manage partial positions during the day either.

AA,

Some questions:

With partial profit taking, you take the first profit at point X and the 2nd profit at Y. When you did the backtest with all or none, did you take all the profits at point X or point Y ? How do you determine where point X or Y should be without violating the rule of letting profits run? I think if Y is too far out, chances of being stopped out will increase, unless the stop is also a big stop.

pretzel

 

[nitro]

IMHO, entry is KING.

nitro

 

[Moa]

IMO, you only take profit when you withdraw funds out of your tradding account... otherwise you are only taking a new position: long, short... or flat, and this must be precisely defined by your strategy.

For me, exit point and stop loss are two diferent concepts. Exit is the counterpart of enter point, in coherence with it and with my strategy and defined before to enter the trade, its goal is to make a profit: the 'taking profit' point. Stop is an additional emergency exit in order to limit loses and thus increasing the overall result, its goal is to avoid a loss.

What I can say, is than by backtesting my strategy (statistical), stops ALWAYS bring to worse overall results and that is less comfortable but better to let run large loses... and large gains.
This makes sense intuitively, assuming stategy is globally positive and stops are hit randomely, because you stop more gaining trades than loosing ones.

Excuse my poor English... ;-)

 

[jack hershey]

Quote from JT47319:

When you decide to cash in, what is your method and why? The two most common I've seen is either the half and half where you lock in your profit once you reach your price target and let the rest ride. Or the all or nothing method, selling at the near top (or what you think is the near top).

I typically go with the latter method, but just today I was reminded why this could go against me. I was riding KLAC from its lows and sold at the morning rally when it started showing weakness. Of course, it was just a ploy to shake out the weak hands and off it went. I hit myself on the head for being faked out. Luckily, I was able to jump in on a pullback and ride the rest way up. Again, I did the all or nothing method.

I know Pristine and others suggest the 1/2 method, but the trading books I've read by Dr. Alexander Elder suggest that this method is not the most optimal. As I am still quite new to trading, I'd like everyone's philosophy on this.

You are now becoming aware of something very impotant. What you secribed observing was the normal sequence of a trend setting up. I'v e attached a comment chart on someone elses trade.

BY doing two things, you can advance your profitability.

First look at volume as a precursor of price action and second take the trouble to construct the trend channel.

Volume rises swiftly and price breaks out into a thrend (long or short). Increasing volume sustains the trend. This forms the width (volatility) of the trend and it's respective channel.

he show of weakness you observe is the first decline in volume. At that time you have found the slope of the channel, formed from now and the inital starting point. With the width already in hand you can draw two parallel lines.

You, later, reentered on a retrace. This is simply the channel continuing along.

At some point the volume will not rise again sufficiently to cause another traverse across the channel. Probably if you lookat the prior established intermediate term resistance you will find that the channel has risen close to that value. It is time to either exit or reverse and continue to make profits.

If the channel is a fast one, usually the price goes into congestion and hangs at resistance for long or support for short trend.

If the tend pace is slower, then reversals are likely.

With regard to scaling or maximum holds, over time you will find that scaling is not a necessary strategy because you have filled in the gaps in your trading algorithm. scaling is used primarily by peole who determine that they are at risk because of the things that they do not have under control. when you read closely what they write you can see what it is that they do not deal with.