Mark Douglas in the Trading in the Zone recommends trading a 3 lot and having profit targets as the price moves in favor. For a long time now this has been a strategy I've been applying to my trading and since he is a very respected guy in the business its hard to argue against this strategy. But just yesterday I had a chance to read a book by another very respected individual Van Tharp and in his book Trade your way to Financial Freedom he specifically point that this is the strategy to avoid, exactly opposite of what Mark Douglas recommends. Van Tharp points that this kind of trading is totally against the golden rule of trading "cut your losses short and let your profits run". After reading his suggestions it makes me wanna to review my whole strategy. In general I feel that one of the guy is right and one of them is wrong, there could be all kind of debatable issues for and against both strategies maybe some long term profitable trades could make some comments here and give your perspective. I'm a intraday futures day trader, trend follower and Mark's strategy certainly makes more sense, but I could be wrong.
Trend following strategies tend to have more losers than winners. There's nothing wrong with that as long as your average winning trade is bigger than your average losing trade. So profit-taking aka "scaling out" is risky for trend followers because it reduces your average win.
I think the Douglas strategy calls for you to trade 3 lots so that you can take profits on the first two, and if the trade continues in your favor, move your stop to break even on the final lot and let profits ride with a "risk free" trade.
I have debated this as well. Psychologically it seems that scaling out is best... However if you enter 3 lots and get stopped out, then you take a full loss on your position, whereas you are only taking partial profits as the trade moves in your favor. You would want to do the necessary math to ensure you're not taking disproportionately large losers vs winners. I prefer to scale in AND scale out when possible. Easier to hit a moving target with a shotgun than a rifle, as one great trader said.
I use autotrader software which has a nice scale out feature. Say you enter with 3 lots, you then enter your stop loss, your target price and the number of contracts you want to scale out. The software then treats each lot as an individual trade moving the stop loss to the take profit of the previous lot until you have liquidated. If you want to let the final lot run, then you can cancel and manage it manually. If you want more info here's the website: http://www.autotradersoftware.com/ The developer Jerry Sy is great (once you register).
This is the exact strategy, but Van Tharp goes as far as calling it dangerous and suggests to avoid it. Instead says that a the position should be held for a big profit. One could argue that when the market is just bouncing back and forth without any major moves the trader holding for a big move could be in profit for a while but eventually his stop would be hit, however the 3 lot trader would at least get partial profit on the first lot and perhaps break even on the remaining 2 lot. This in fact would reduce losses in whipsaw market, comparing to the buy and hold for a big one strategy.
If youy are successful in the way you are trading, DO NOT change. Don't let greed take over you...remember, most traders are no where near your success...if you are telling the truth
Yes, exactly. If what you are doing is already working- don't start messing with it. Compulsive speaks the truth.
Guys, thanks for encouragement, ... what I'm doing has been partially successful, I still make mistakes and I feel there is a lot of room to improve, so I'm still searching for answers.