Exits-- targets vs. trailing stops

Discussion in 'Trading' started by monee, Oct 9, 2002.

  1. monee


    I would like to start a discussion about having an exit target vs. a trailing stop.

    The trailing stop, trailing by a fixed amount doesn't work well due to the fact that the volatility of the mkt is different each day.

    The moving average has the same problem some days a 10 period works other days a 20 period works ,ect.

    So what I am thinking is, go with a price target and if after a minimum gain you specify, trail by the fact that all profit above this gain you only will allow x % of this gain to be taken back by the market before closing the trade.

    Or just have an exit target and when the market hits that ,then you trail or if it doesn't hit that, it hits your stop.

    Psychologically this last method would be tough for me having a big profit but not reaching the target and giving all the profit back.Even though psychologically this last method is the toughest,
    my gains overall would have been greater using it.

    This is all concerning intraday trading.

    Well this is only my opinion, what are everyone elses thoughts?
  2. Flynn


    Why not to use both of them? Put the target and trail your trade. If target is not reached and market reversed it will take your stop. At least you will not loose
  3. acrary


    Monee, it sounds like "you want to eat your cake and have it too". Profit targets improve the % wins and keep drawdown periods small. However, you never get the benefit of the non-normal distribution of gains in the market (fat tail trades). Trailing stops, allow participation in the big moves, but because of their lagging behavior, you're stopped out more often with a loss. Many traders want to use targets for consistency, but when a huge move happens and they only have a fraction of the profit, they get frustrated. You need to decide which goal you want to pursue (home run champ - trailing stops, or batting ave. champ - profit targets). Because of the non-normal distribution of profits in the markets, the home run champ is the better of the two ways to go. I'd guess that most amatuers go for the high percent wins and may have 60 or 70% win records. However, the pro's know it's the big trades that make the big money.

    I'm guessing your entry method is either a breakout or trend following. In both cases the goal is to keep the account near breakeven and cash in when the fat tail trades happen.
    Here's one approach for you to consider:

    I'd be looking to break my risk capital into 2 or more units. On a long trade, I'd buy with 1 unit. When the trade was ahead by the amount of the original stop loss point, I'd buy with the second unit and move the stop on the first unit to breakeven. This way, your risk is half of a normal strategy while giving you the ability to participate in the big wins with a larger position than when you lose. If the laws of normal probability hold up and 50% of the time the market stops you out and 50% goes higher, you'll make plenty because your winners will be twice the size of your losers.

    As far as followup, try letting the market tell you when to move the stop by moving the stop only after a retracement followed by a new high/low. In a long trade, I'd move the stop below the retracement pivot point after a high was made. This way, as long as the market is running, you're in it. You can experiment with parabolic stops, chandelier exits, or shorter channels to see if another approach is more comfortable.
    K-Pia likes this.
  4. I prefer targets over trailing stops. I stick to 6 point targets on the estx50. So far, 22 trades, 19 wins, 3 losers. Had I used trailing stops, I would've had more losing trades.
  5. cashonly

    cashonly Bright Trading, LLC

    Both have merit.

    Targets can be particularly beneficial if you use them around price support/resistance points.

    There was an interesting article in either TASC or Active Trader about using Volatility based trailing stops and it said that these could give you more of an edge than regular trailing stops.
  6. I'm a target man. I like to eat my cake. If you want your cake, you can have it.
  7. As for TS, I think the going rule of thumb is 150% of 30 atr.
  8. But if you are a TS man, you will then go back and see where 150% of 30 atr would have stopped you out of a good move, and then go on your endless search of trying to have it all.
  9. Profitseer, you ELITE Member you.

    When I had TS I wrote some stuff and tested it with trailing stops, profit targets, and both. The both came out better. Each different method required some testing to optimize the trailing stop and profit target, but in every case using both produced significantly higher profits.

    Of course, this was not a large sample size, meaning I only wrote maybe 15-20 different methods. And the number of days was only 200 at most. When I use the term significant, I am speaking empirically, and not statistically.

    So basically you could say I am talking out of my rear end, but so did Jim Carey and he is really wealthy!
  10. monee


    Thanks for everyone's thoughts.

    Acary,my work has found the opposite of what you are saying.

    Trailing stops have closed me out of many trades making 4-5 ES points only to watch the market travel another 10 plus points without me.
    Many times I would have been better off leaving my original stop loss and walk away from the computer for 1-2 hours.
    I agree with you 100% the high % win # is not as important
    as catching the big moves.Otherwise you generally have a lot of small losses and slightly larger winners and basically tread water.
    Then, if a losing streik occurs you are under water..bad for the attitude, and the account balance.
    Your example about breaking risk capital into 2 units sounds interesting.Where do you place the stop on the 2nd unit? At the place of the original 1st stop?
    I have often thought that breaking the trade into 2 parts, the 1st entry in a trade should be for a smaller gain ,and then wait for a pullback and another setup for the longer hold /larger gain.
    Overall great post Acrary .Good to remind me that the home run champ will work out better for me than the batting average champ.
    #10     Oct 10, 2002