I am running into a dilemma and would like to get some opinion. Please feel free to share your thoughts. Here is the situation-
I have a long term trend following system and often times it catches the big moves. It , however, as you might have guessed, gets whipsawed often. To avoid/moderate the situation, I started taking partial profits, 50% of my position at 100 pips, and then let the rest of it run till the time I get my exit signal. The problem is that in case of whipsaws, my losses (no matter how small) are completely unadulterated (ouch**) and when I get the winners, it does not completely nullify the situation- let alone make any profit. Let me take the example of a recent GBPCAD trade, I ended up with +250 pips but it was 50% unit size of first 100 pips and 50% unitof the remaining 150 pips. As you can see that I reduced the profits by approx. 30%, but the same managemement is saving me in an ongoing USDCHF position where I took 50% at +100 pips and now even if it comes back to 0 (I wouldnât want it to go below that), I would still have a profitable trade. Also, in another EURNZD trade, it is 2 whipsaws in 3 days- one of the big drawback of trend following systems is that you have to play the game always- you never know when the big move will occur. So basically I am whipswaed 2 times in a row and loosing more money than I would have made had it ran through a run of 200 pips or more. After doing some basic math, looks like even though I am grabbing more pips, I end up not making any profits but just making up for losses. So thats my dilemma.
Trend following systems require you to hold on for the really big gains as they are what drives the profitability. If you donât do that you very likely kill the performance. Run some back tests.
One thing you do not mention is where you are placing your stops. I assume if you are taking large losses on the trades that you are not succeeding in then you probably have quite a large stop?
if you can improve your entry accuracy somewhat you can possibly narrow your stops and thus reduce the risk per trade (that is indeed if you trade with a large stop)
Say for example you trade with 100 pip stop. and you are taking profit at 250pip then this is a reward/risk ration of 2.5:1 If you only have a 30pip stop and still target at 250pips the your reward/risk ratio will be 8.33:1 you may fail more often but you get more bites at the cherry this way.
If taking a partial profit consider taking that profit at an earlier stage maybe 20-30pips and then moving your stop to break-even. This ensures that your trade is profitable and that your open trade is essentially free. Your second part of your trade will probably get stopped out more often but you may well be banking more money in the long term.
This is all Information that I have gleaned from ICTâs thread - âwhat all aspiring & or new traderâŚâ on this forum hop on over there for more info if you havenât already.
I did manual testing with historic data with only the basic entry and exit- without the partial profits strategy. It seems to work. In actual practice though, I thought that taking profits canât hurt- which actually doesnât, but that is limiting profits seriously as well. To correlate with Turtle volatility breakout system, they added to the positions when it started to move in their direction. I am not comfortable with pyramiding so not thinking in that direction but maybe I shouldnât be reducing the positions when it moves in my favor- but then I would loose out on a lot of situations where price actions goes some distance in your favor and then completely reverses :17: ⌠Its a tough call⌠Are you aware of any good back testing tool/site where I would be able to input not only indicators but also risk/money management inputs also, that is free? Please share if you do.
I will check out the thread. Looks interesting. Thanks for sharing.
I do use manual stops âat closeâ and keep a track of my open trade during the day as well- I also have very strict money management rules in place- so havenât taken any serious hits so far, which is good. However, due to the risk management policy of taking 50% profit, my profit taking potential has also been curtailed. Thatâs my concern.
The risk to reward ratio doesnât make sense to me somehow- as if the system has serious edge then a person can get away with low RR as well but not the other way around. so as long as MM rules are there, I would take trades that would go as low as 1:1, as long as I am confident. A very high RR ratio would mean getting stopped out very often, which would not bear well for a trend follower But I will contemplate on what you said as well. Thanks for writing and pls share if you have any more thoughts.
Keep in mind a couple of things. The Turtles didnât pyramid, they scaled in. Different entirely. They also never took partial profits, but instead waited for the trend to end. Also, they were playing like 15-20 different markets to ensure sufficient trading opportunities.
Are you aware of any good back testing tool/site where I would be able to input not only indicators but also risk/money management inputs also, that is free? Please share if you do.
Microsoft Excel. It may not have all the bells and whistles of other systems, but itâs a lot more flexible if youâve got the skills.
Looks like I spoke too soon and jinxed itâŚ:46: ⌠Got hit by two big ones today⌠in the whole bullish market sentiment deal. :p.i think it is very difficult to decide whether to go for manual stops or actual physical stopsâŚphysical stops provide a bait for brokers to come huntingâŚatleast thats what i feltâŚbut manual ones hit very hard whenever they triggerâŚdonât know which one is the lesser of two evils⌠TGIFâŚ:24:
OkâŚSo I backtested some scenarios and thought would share the findings with everyone. Taking partial profits is not as bad as I thought, it actually is better in the sense that even though it reduces the profit margin, it converts almost 50% of loosing trades into profitable or very less loss trades.
Exactly Even though your âpotential profit marginâ may be reduced you are actually making money as opposed to floating around the same point.
There is nothing wrong with having a take profit level at 100pips or 200pips or even 1000pips as long as you have a valid reason to set that profit level. Just having a static 100pip target on every single trade is never going to work.
You have be dynamic and change with the market and in all cases look at trying to preserve your capital and wherever possible take a little bit of profit on a trade and move your stop to break even. this way that trade is never going to lose your money and I know Iâd prefer to be ÂŁ20 up and banked with a potential for greater gain than still have an open risk of ÂŁ50.
But I will contemplate on what you said as well. Thanks for writing and pls share if you have any more thoughts.