Two techniques for locking in profits are using a manual trailing stop and scaling out of a position. Each has at least one advantage and disadvantage over the other. One can scale out of a position at the exact current price, and capture the equivalent amount of pips. The downside is that all of the volume that is now out of the trade can no longer earn moolah should the trade continue in one’s favor. The advantage to using a trailing stop is that the entire volume remains in the trade and can potentially lead to a greater profit. The downside, of course, is that if price backs up and hits the stop, less profit would be captured than would have been if scaling out had occured.
What, if anything, do you feel tips the scale in favor of one over the other?
My understanding of scaling out is to lock in profits. When coupled with adding (scaling in / pyramiding)more position upon every retracement. The act help to maximise profitability while mitigating risk.
Trailing stop also helps to lock in profits. During high impact events, whereby extreme volatility is expected, Price move tend to be one sided. Trailing stop will be better than scaling out since, chances of retracement are lower or come later after price have trail quite a distance. Trailing stop will ensue maximum profitability in this instance. But then again during high volatility, Spread tend to widen as well. Thus, broker will do what they can to ensue their maximum profitability.
Since Market move in Swings and rarely move like a choo choo train. My Gut feel is, most times Scaling out should be more effective than Trailing stop.
Thanks for your suggestions. I’ll be thinking about them - but in the case with high impact events, price can move quickly in either direction, so I don’t understand why you’d favor TSs here.
Hey Norm,
I’ve been thinking about your question, and I think I came up with something. If price looks like it’s about to run into a strong resistance (like a monthly resistance while trading H1) and there’s a high probability it will bounce back, it’s probably best to scale out the lion’s share of the volume rather than let it bounce back and hit the stop and lose some of the profit - unless, of course, retracements have been allowed for in the placement of the stop.
Would still like to hear some other fresh and meaningful input, same as you, I guess.
Yup, i thought about that.
Volatility you can divide into 3 category.
Extreme volatility
Nice volatility
Low volatility
In the case extreme volatility. Regardless whether we use trail stop or scale out. It is as ineffective. For example, quick spike up and down. With trail stop either you stop out quickly with profit or not. With scale out, you probably will be unsure which direction u want to get back in. Bull and bear are still wrestling. The coast is not clear yet. There is no way to implement scale in to optimise the efficacy of scaling.
Nice volatility is what we want. Upon breakout, we are hoping for a nice long candlestick of price trending nicely in one direction with late retracement phase. With trail stop, profitability would be optimised. In such case, scaling out would seem overly conservative, much pip lost, simply not optimum. On the other hand, even if we adopt scaling as the default style. Sometimes with nice volatility, there can be early retracement phase as well. Timely scaling in upon each retracement can also be just as effective as trailing stop.
In the case of Low volatility, market choppy. Trailing stop would be quickly stop out, and pale in comparison with nice volatility in terms of net profit gain. Scaling would be more effective with timely re-entry.
All in all, IMHO i believe scaling is a better default style
Hi Norman, thanks for posting as I have exactly the same issue - which to use.
I really struggle on what is the best exit strategy once in a winning trade & normally get it wrong
I have used TS to great effect on Trending markets - but how do you know the market is going to continue to trend your way at the start.
When the trend starts going my way & have had a nice little unrealised profit sitting in my account, of course the trend reverses & have ended up with a loss.
I also am unsure if scaling out or scaling in is the best trading approach.
Any more posts or ideas appreciated
About which to use, perhaps you should read my last post as I think I came up with a key.
About your reversing issue, I’ve experienced it and have become conservative in my goals instead of swinging for the fences with a 2:1 R:R, etc. Please understand that I haven’t even gone live yet, and these suggestions are from one who has not yet proven himself in live trading, and has yet to prove himself in demo. However, Boris Schlossburg and Kathy Lien are among the forex zillionaires who, themselves, espouse conservative goals. Boris: “Never let a winner turn into a loser.” Kathy: “Bag your profits quickly.” As far as the 2:1 R:R, Kathy says, “The markets are not always that generous.” Other such aphorisms: “A bird in the hand is worth two in the bush.” And my own, “Learn to earn a little now, learn to win a lot later.” In other words, close your trades while in profit, or at least lock in profits while you can. I also trade with a profit target (Take Profit) and, when my trade approaches that target, I stretch it out while, at the same time, move my stop in that direction so I can “let my winner run” while, at the same time, protect my rear.
Thanks Norman, I haven’t yet come across Boris & Kathy so will read with interest their thoughts.
Yes - wise words on locking in profits. One of the challenges with FX is you get on a beautiful trend trade & using a TS that works wonders for a great exit, and the next trade using the same entry signals ends up being completely different & using a TS results in a loss, so you can’t have a one size suits all exit strategy which is what I have been doing.
Seems will need to look at exit at predetermined TP & if trading a winner look at scaling back in.
What are you looking to achieve with your Demo trading before going live?
I am very much use to with scaling out of a position technique among the technique for locking in profits that NormanA said. But I also wanted to know detail about scaling. I also wanted to know what if price runs in a strong trading time. Because I know there are most chances to bounce back. How can I take most profit from scaling than? Or I just have to see my profit losing?
I got introed to Kathy through her very helpful book, The Little Book of Currency Trading; and as for Boris, here’s the article where I got that quote, which is its title: Forex Trading Rules: Never Let a Winner Turn Into a Loser. You can also find some free stuff from them on the net. I’ve recently subscribed to their emails, but although they’ll answer individual questions - very briefly - it seems that almost everything they offer on their site comes with a price: http://www.bkforex.com/.
Consistent net profits on at least one system. I haven’t found it yet, but the focus is sharpening. Best bet so far, trading engulfing candles on the H4 and/or daily. Look into Walter Peters (FxJake) and Timon Weller for great instructions on these. What I’ve just decided to do is test this and other strategies on Forex Tester 3 as opposed to doing demo after demo, which gives very slow results. FT3 can multiply the speed of results tremendously, and many traders swear by it. I am hopeful that this will turn the trick for me.
This is an excellent topic and I don’t want to divert the good debate Norm has opened. Knowing when to get out is far more important than knowing when to get in.
However, I am not in favour of either scaling out (nor scaling in for that matter) because I only want to be in trades that are with strong trends. I always open each trade at full size and actually believe in doubling up when break-even is passed.
Nor is a trailing stop a good technique for trend-followers as it doesn’t trigger when the trend has broken. And if the trend hasn’t broken, why get out? Alright, if there’s nothing else to go on, a dynamic stop like that or like -2xATR14 would be OK but I don’t want to be exited from a good trend until its the last resort and there is no more trend.
A stop which I am using however is the time stop - so if I enter a good trend but price then stalls for days and days, I get out to cap the risk of a surprise counter-trend move. I want to be flat in a flat market.
I have lost more money ‘letting winners run’ than I have from being stopped out on losers. Stands to reason I am a novice but if looking at the options of SO or TS…I would look at the timeframe I am trading and how frequently I will be checking charts, which would factor reaction speed (it is easier to gradually SO in increments over a few days. Also, my first inclination is to break-even then see if there are legs in the trade for a humble profit. I find that with my psychology I am (now at least) brutally disciplined with risk but allow myself a lot of ‘feeling’ when collecting rewards…that feeling being nerves. I started trading live from day one and due to my aforementioned experiences I tend now to collect profits far too early (better to learn to improve the winning side of the equation than the losing side), hence a diminishing bias to TSs. With a TS you have already made all the decisions by the time you open the trade. SO merely reinvites emotion/risk etc back into the equation.
All said and done, I am now migrating over to SO more often on longer duration trades that I will watch with more interest. With the shorter more volatile trades I will go for a TS. I have often wondered if there is a possibility of combining both TS and SO. I am in no doubt there are certain circumstances when it would be advantageous.
What I am about to say is not to contradict what alpha or tommor have said about scaling in (pyramiding). I have yet to solidify my own approach; but here’s one thing I would say about scaling in: You need to be extremely careful before you do it if you do it at all, because even though potential profit will be cumulative because of cumulative trade volume, what you’re actually doing when scaling in is adding another trade with risk.
Let’s say you’re in profit, the trend looks like it’s going into orbit, and you decide to scale in. The first thing scaling in requires is locking in profit with a stop loss in the profit zone. Then you’ve got to place your scaled-in entry far enough from the stop so your scaled-in trade won’t get stopped out prematurely - and, of course, it can get stopped out. So what you’ve done is take a risk-free trade where profit is already locked in and then added a new trade on top of that complete with risk. And let’s remember: The added on trade is closer to reversal than the original!
I would say that scaling in in this way is valid ONLY if you think the second trade could stand on its own two feet as a potentially profitable trade.
Thanks for dropping in . . . but isn’t doubling up the same thing as scaling in - not scaling in while still in the negative zone, but scaling in while in profit? Perhaps you can clarify.
Are you saying that you don’t move your original stop loss at all, but simply bail out when price goes flat?
I don’t understand. The purpose of a trailing stop is to stop price from going against you too far. How can it not trigger when the trend is broken. Are you referring to an automatic TS as opposed to a manual - or to both?
Scaling in for a lot of people means entering with just a partial trade committed, then adding to it up to full size. What I mean is open trade with max capital that risk management allows, then keep adding another new trade of same size: I would be happy to eventually have all capital committed to just one pair with multiple trades along the same trend.
Time stop - Yes, if price doesn’t hit either my initial stop nor break-even within x days, I just cut it anyway, whether its in profit or loss. The reason for entry on Day 1 into a trend-following trade is invalidated if price doesn’t move with the trend, so the reason to get in was good but the reason to stay in has gone.
Trailing stop - Its possible for a TS to trigger or to be manually triggered during a really nice strong continuing trend. It is going to be either early or late, depending on how far away you place it, but either way it can’t match the precision of the best exit price according to the TA.
I see what you’re saying, but what would you say would be the best approach if one is about to go to sleep or work or otherwise leave his computer for an extended period of time? No manually adjusted or automatic trailing stop? Simply leave the original stop untouched? I have a hard time wrapping my head around that. What would you do?
I admit I go to and fro with stops and what I do varies across the weeks.
But I’m not saying have no stops. As I favour trend trading, its easy for me to see on the chart a level at which the trend could be counted as being probably broken, and setting a stop there. It would never be lower (in an uptrend) than the original stop on the first entry, but it could be a physically wider stop once price has run up some gains: once the trade has reached profit equivalent to the original risk I’m going to double up anyway.
But I sometimes break my own rules. Often, when I double up with a second trade I move the SL of Trade 1 to b/e and place the SL of Trade 2 at Trade 1’s entry, so I would have 2 trades open but the same loss risk as with one. Of course, this disregards the TA as it has changed since Trade 1 was opened but that just demonstrates how hard it is to be rigid about stops. I cannot definitively decide which is best approach.