One of the lessons I’ve been told is that trading is emotional and I should set out my parameters (entry and exit points (SL, TP)) and my trading strategy before I even execute the trade.
I was wondering, does anyone ever allow taking their TP early in their strategy?
I ask because recently I did a trade and I set my TP so my reward risk ratio was about 2.7:1 (which is fairly high for me. So far, my trades ratio are about 1.5-2 : 1)
The trade seemed it was going well, but it never reached my TP. It became apparent after the trade started, that at about reward ratio of 1.7-2.2 : 1, there hit a support level and the price kind of just lingered there for a long while before finally shooting back the way it came and hitting my SL (which by then was my entry point so I lost nothing).
So in this situation, where a support level was developed after I executed the trade, should I have exited the trade making a profit, but not as much profit as my TP level or should I have stayed for the course until my TP was hit even through it would’ve needed to go through a support level?
If for the former, should I have a minimum risk reward ratio I should accept or should I just accept any profit as long as soon as I think it’s going to be too hard to reach my TP? Also, given that I’ll have to make this decision after the trade has been made, how I can prevent my emotion from taking a part in my decision making?
I never fool around with my targets. You definitely do not get smarter in a trade, you may with hindsight see this that and the other based on your emotion so lost paper profits. But in general I find a leaving your trade be is the best bet. You should have analyzed everything there was to look at before you pulled that trigger in the first place. You should have set out your trade management plan based on what you saw. Once you pulled that trigger you are no longer in analyze mode but execute mode. Executing that trade idea/plan to perfection.
So in regards to number 3, how do you do that without violating number 2?
Would you have some sort of condition beforehand? And how would you structure a condition such as this (eg. if the trade is going sideways for a long time, then I’ll lower my TP by some amount etc.)
Just wondering, is your Take Profit target generally just one price or does your trading strategy include more sophisticated conditions like if the trade goes for a certain period of time, then you’ll extend or shorten the target? Or if a certain indicator says a certain thing, you’ll move the TP?
I don’t think I would ever bring my target down, unless I was running out of time. This happens on trade desks that you have to be flat for the close, so I want to maximize my winner but I have to keep up with the risk manager. I wouldn’t inherently lower my R ratio if I am in control myself. The reason is this, what made this R ratio worse between my entry and now? If this reason existed before I put on the trade, I made a miscalculation and a mistake, and this trade should be exited immediately. If the reason occurred during the trade, I can not really justify it because I would rather reduce downside risk. This way I am still letting a winner run, but not letting it turn into a loser or as bad a loser as it could be. This could be scaling out, or moving my stop up to lock in profit. Protect your backside, don’t chop off your upside.
This is very strategy specific, this is why taking good notes and systematizing your entry is critical. I use all types of exits you mentioned. But lets get this straight, I know my exit criteria before I enter the trade. Just because I have multiple exits doesn’t mean I am selecting them willy nilly, only if the exit criteria is met then I will flatten the trade. Here are a few examples you can use, or just to think about. It may just confuse you, but what your going to have to do its look at your past trades and work out if these would have helped or hurt your strategy. There is no 1 size fits all here. I am going to classify this as topics about exits, because this can be stop losses as well. Its all under the category of trade management. Scaling out is also another factor you have to consider. So lets assume in all in all out scenario.
Time based: if you have not TP’d after X amount of time move my stop up or scale out, or are not profitable by X time close the trade. This helps ensure you close your losers early and let your winners keep working. Remember we are cutting our downside risk, but still leaving part of our position on to work.
Indicator based exits: so you can exit when price pierces the top bollinger band, if your long, bottom if your short. I would consider price action based exits here as well. So closing out at a resistance level or support level, or if we see an engulfing bear candle close a long position. Lots of oscillators work great for this.
Trailing stops: everyone is familiar with this one, the criteria you use is what makes it different. So price (100 pips) based obviously is the most common. But there are also volatility based, pivot based, price action based, etc. Could also be a moving average under your trade or trend line/ channel that you draw manually.
Adaptive stops: I like using these on my swing systems. These are stops that are usually algorithmic. What they do is they take some information from the market, price, volatility or what have you and generate a stop that reacts to current market conditions. I am not going to share mine cause I worked really hard on it, but a quick search on google can probably lead you down the right path. This can also be reversed for targets. Usually they switch based on regimes and volatility, at least that’s what mine do. They decide ok whats our volatility right now, whats our regime. So you have high vol trending, low vol trending, high vol ranging, low vol ranging. Depending on the environment it will determine the new best position for the stop or target.
That is oversimplification. Probabilites changes dynamically and as long as you have an idea of how to use information that you get i don’t see why you should ignore this information. From experience I would even say you are losing a lot of edge if you are following such a rule.
Why there is such a unlogical rule at all? My guess is that it has something to do with admitting that one is wrong (bad tp or sl placement), so instead of spending some time analysing what is best adjustment, they make a rule that they won’t change anything.
No doubt about that.
Maybe: Experience? Confidence? Knowledge? It all depends on a person.
I’m no expert but going through the school & the forum, you always get told to leave your TP where it is - you analysed the market & placed it there for a specific reason so that’s where it belongs (trust your judgement).
As you said, you moved you SL up to break-even so you didn’t lose anything so in my opinion, you did the right thing just letting it play out. You’d be kicking yourself if you manually closed the trade because the price was moving side sideways at a support/resistance point & then it proceeded move in the predicted direction & hit your initial TP. Hindsight is a wonderful thing.
Personally, I like to be out of the market by 4pm GMT so I’ll either manually close out a trade if price is idling or put a tighter trailing stop on it so it has room to move but will close out sooner rather than later if price turns against me.
These are just my thoughts & as I said, I’m far from an expert but the above seems to be working for me.
I would not recommend that you adjust is. You should analyze the market and create your exit and entry levels prior to your trade execution. It is only prior to your execution where you are emotionless and are able to analyze price action the best. Once you set your take profit as well as stop loss levels (or hedged if you prefer to hedge) execute your trade, set the levels and leave them alone. A good trading strategy is worthless without execution. Too many new traders fail as they adjust their take profit levels higher when a trade goes their way due to greed and their stop loss levels lower when a trade moves against them out of hope it will turn the corner.