I certainly understand scaling out to reduce risk at key levels, however, I question adjusting your stop up from your initial key level unless the market has created a new major lower high (going long) or higher low (going short) depending on your trade which is not very often within the course of any single trade. Certainly just moving it up (or down depending on long or short) just to create a free or reduced risk trade lowers the probability of that trade in any system. Trade setups take enough time to form without reducing the odds and taking tiny profits in lieu of allowing the trade to play out. The market can easily come back and eat your new stop before moving on to complete the trade for full profits. Any good system worth its salt gives enough profits over losses to compensate for the times a trade goes bad so I would think moving your stop up, even after the market has moved in your trades favor enough points, is a lower EV move unless, once again, the market has created a new major high/ low, rather than just moved far enough out from your entry you feel you can move your stop and get a free/ reduced risk trade. Thoughts?
That's the only correct answer. All depends on the charasteristics of your system. Nobody can answer that question better than yourself.
The only straightforward answer IMO is that moving your stop to B/E too soon is a guaranteed way of not making profits. Doesn't matter if you don't lose if you never make profits either. On the other hand - it does not seem smart to let a winning trade turn into a loss either. So, I will typically B/E or more after some followthrough and rather re-enter if stopped (usually an option as I'm monitoring the trade in real time).
There are tradeoffs when you move your stop losses because the nearer to the current price, the greater the chance to be stopped out. Still, I favor smaller losses. I have lost count on the number of times a trade you think has a fair chance of succeeding, ends up failing. You want a quick out with most of what is left of your monies. I do not worry about the losses. Instead, I look to re-enter the trade if the stock moves in the initial direction I expected it to. If not, then, the stop loss, saved most of my capital. Smaller losses, no matter how many are easier to overcome. It just takes one good sized winner to put you back in the black. Psychologically too, it is far easier to handle small losses compared to very huge losses.
A far better strategy is to tighten your stop because chances are where you bought, others did as well (if your strategy is solid). Therefore, you know, and the boys know, where all those unchanged stops are. Assume you bought the Dow at 26,800. Initial stop at 26,700. Market moves up to 26,900. Rather than go to breakeven, move the stop to 26,750. Now, if the market goes for those unchanged stops and rebounds it won't get you but if it contiues to dump you'll probably get taken out for a good loss, better than the original one. I do the above, and it works very well. Although I shorter term trade so my stops are a lot tighter.
There are no chances. There is only backtesting. Well, in-sample backtesting, OOS forward testing and live.
SL should be moved to a level, where you believe if that level is broken then the trend your trying to ride is broken and the price will probably only get worse for you, so no point holding as your counter trend. Getting SL'd out for less cost sounds great, but in reality you've just got to place another trade and put that risk right back on again.
If I am going for a swing trade (two legs or more) on successful Bull BO’s in the form of Strong spike my sl has to be just below the bottom of the BO because such BO’s can have deep PB’s after the first or second leg move and if my SL is too tight I will get stopped and just to see it then go in my favor. If I got in on the first leg up I would not tighten my SL until after the first PB or two ends and a resumption of the bull trend continues. I want to see higher lowers and higher highs after pb’s before I adjust my SL tighter. However, if I am scalping 1 to 3 points say in the ES because I don’t think the BO is very strong I will scalp the BO several times compounding profits as it moves up. That is, scalp say 2 points..grab the profit let it drop a point or two enter again..then grab another point or two..ad nauseam all the way up on the spike till it spikes out. Often this will be several 1 to 3 point spikes on the same bar. Or it could be over a few bars.
If you try to attach rules to that (and then backtest it -- even 'by eye'), you'll find the lie: a trigger to exit is not a trigger to enter in the opposite direction. In either direction, I "enter on a shout; exit on a whisper." • Are some profits missed? Yup! But my goal is not to maximize the profit from each trade, but to have a *system* with a positive expectancy. (Call this, Bread&Butter.) • What of those interminable slogs of up or down where price action looks like molasses? (And thereby: very few signals are created by normal market programs...) Put that scene into a second system -- with tighter stops, time-based (not price-based) exit trades, et cetera. (There's no reason that you can't have fun. Just don't let it mess with Bread&Butter.)