Good morning, WWMDT = What would Mark Douglas think (author of Trading in the Zone). I am posting this to get a rapid reaction on what I believe to be a decent "exit strategy" when it comes to swing trading. My goal is to be no less than a 2:1 profit/loss trader without limiting my upside by employing the "trade mechanics" as follows: 1. Enter Long (based on my predefined "edge") using an equalized risk-per-trade calculation that determines my position size and exit price for a 1R, 2R, or 3R based on a maximum potential loss of not more than 2% of my total buying power. This calculation also includes the placement of a hard stop loss that I have chosen based on what I am seeing from the price action. 2. Once the trade has reached 3R I would cancel my original stop loss from above and place a trailing stop at the 2R level. The trailer would obviously be the difference of the 2R and 3R. 3. Each time the trade reaches another reward level, move the stop up to the preceding R level. I recently read Mark Douglas' book Trading in the Zone and I sort of wonder what he would say about this strategy. Also looking to get a reaction from some of the more experienced swing traders, independent from what Mark Douglas might say...
Since the vast majority of your positions will hit your stop before reaching your 3R target level (if at all), your best bet is to move the stop to break-even as soon as 1R first target is hit. Then when 2R target is hit move the stop to 1R and so forth. Still one of the best ways to milk a strong trend until the end.
This is a static approach. It is static in that you are entering based on the current conditions (good), but you are setting the stops and targets at that time too. As the trade progresses, new information is there, but yet your targets and stops are set on old data at the entry time. Consider re-evaluating the targets and stops as the trade progresses and there is significant new information. By the time R3 (target) occurs there should be a lot of new information. e.g. By the time you hit R3, you might have seen new entries that you would have taken (maybe) if your were not already in the trade. What where those targets and stops? This type of information is relevant to a far off target. OTH some tactics call for set and forget. That is OK too, but it is not the only way to trade. Yet some think it is the only way, but it can also be the lazy way too or it can not be the correct way for your tactics-premise. Lastly if I were to do a "set and forget" tactic, I would do multiple trades simultaneously, treating each one independently. BTW: Tradex's comments are also legitimate but are a continuation of a semi-static approach unless you make those changes based on the post entry, new, data, beside that fact that the targets are hit. It all depends upon the tactics you are using for your premises and how well they fit together. Hope that helps.
The only possible "new information" is a new signal in the opposite direction, and in that case the trader should immediately close his existing position(s) and place a trade accordingly. Otherwise he should just keep trailing the current trend until the end.
You could do this successfully years ago. Now algos will take your stops most of the time. This is a losing approach these days. Try it and you will find out.
Interesting. Is that to say that stops are an outdated method of risk management? If algos are taking stops like that, what is an alternative approach?
You have to be smarter than a bot, which is not to hard presently because they are not always active-trading and when they trade, leave big foot prints often with size. Design a bot and you can get some ideas. But it has always been a matter of staying ahead of the crowd, bots or otherwise.
To design an approach that works these days, start by ignoring traditional support and resistance levels. Everyone knows where these levels are and that is why they do not work anymore.
The difference in what Tradex and I are saying is describable as a different paradigms on how to manage trades. To me it is like throwing a piece of meat on the grill. You are committed now, so make the most of it. There is a big difference in a trade that: Case 1) hits T1 and T2 right away and through them easily and quickly and Case 2) meanders around hitting resistance around T1 and barely makes T2 after a lot of time and hesitation. This type of information will help you set T3 exit more accurately to catch most of the wave. And this information comes after you enter. So you need to take it into account after you enter.* To me the information is there, so I use it. For instance, one dynamic method would have you updating targets and stops at static time intervals (e.g. every bar**), AFTER ENTRY . I use dynamic and measured time intervals in combination with the tick behavior-price action. Basically take into account the X and Y axis and how it paints to manage the trade entries and exits. The Douglas book was written a long time ago. I think HFT was at its infancy. Bots were rarer too. Hope this helps. *Tradex says you do not. **Bots assume this fact, sometimes, that is why people try, 4.5 minutes etc., for example.