Setting Profit Targets on a Trend System

Discussion in 'Automated Trading' started by ChrisMMM, Mar 27, 2007.

  1. The System that I designed is a Trend Following System. I am getting fairly good results, however the average win rate is about 40%. So as you can imagine you can with a win rate of only 40% you can have some lossing sessions.

    What I have read is that if you have multiple exit targets you can flatten out your equity curve. Currently, because my system is a trend system, my exit is when the Slope of the Moving average starts to weaken. What I read says that you could exit in ratios of 3's. Where you set a close profit target, a 2nd profit target a little further, and the 3rd one lets it ride. So the Percentage of winners may be...

    1st - 75%
    2nd- 55%
    3rd - 40%.

    I fooled around with this, but (1) it hurts my bottom line, but the standard deviation does not decrease. It is basically the same.

    Does this method work on a trend following system... the only reason why I am thinking that this might not be a good idea is because the basis of trend following systems are based on the big moves. If you are exiting on small profits you are going against the logic of the sytem.

    I could be wrong, but that is what makes sense to me.

  2. I think your analysis is basically correct. Often I find that scaling out actually worsens overall performance, which as you say, isn't totally surprising considering the goals of a trend-following system. It ultimately depends on the statistics of your system. Are you familiar with MAE and MFE? You should attempt to use these stats to your advantage as they tell you the typical movements of the market once you enter a position...
  3. True,

    No I have never heard of that. What is it? Do you find it succesful using it?
  4. John Sweeney originated two concepts:

    MFE = Maximum Favorable Excursion, meaning the maximum profit that was seen at any point during a given trade.

    MAE = Maximum Adverse Excursion, meaning the maximum loss that was seen at any point during a given trade.

    The ability to look at your entire set of trades and learn the average MFE and average MAE can be quite useful in setting stops. It can tell you, for instance, that if price goes against you a certain level, the trade rarely comes back in your favor. This can help you use a more appropriate stop size. Obviously looking at the profit side will help you set targets.

    Try a google search for these terms and read about them and understand them. They can help enormously in optimizing your exits...
  5. Hey thanks, I'll look into that