Strategy A or strategy B?

Hello everybody,
here is a queston I'm asking myself:
Since the exit point defines our profit/loss, it is of a critical importance how we exit. How it is beter for a trader to exit the trades. I'll describe two possible strategies:

-Stratery A: we define "easy" target - relatively close to the entry level. For example profit to be equal to the risk. It is expected to get high sicess rate (60-70%);

Strategy B: We just let the profit run and defive remote targets. In this case the secess rate may be less that 50% (35-50%) and the average profit may be larger that twise the initial risk.

Mixture between the two strategies is also possible, of course, combining the featuses of them.

My questions is: which of the two strategies is more profitable and which one is more easy to trade? Many profetionals may say that we have to let the profit run, but I think that Strategy A also deserves its attention.

What do you think???

 

You asked a great question. I asked this one to myself about 11 years ago when I built my first strategies. It’s a tougher question under the surface than it first appears. I have spent years testing many of these combinations. I will answer it using automated trading strategies.

The first part to the answer of this question is you have to first define what your objective and style of trading are in trading the strategy. For example if you built a strategy to trade trends only than strategy B might be the best solution. That way you capture large chunks or all of a trend. In contrast if you built a strategy to swing trade in congestion or trading ranges then strategy A is probably the best solution. Or the mixture of the two strategies or hybrid might allow you to capture the trend as well as trade through congestion.

The high or low success rate of a strategy is normally irrelevant. These are characteristics of a strategy not an object in trading then. For example one big trend win can offset many congestion losses giving the trading strategy a high win loss ratio. A swing trading strategy can have a high win rate while no trends are available but have a lower win loss ratio. Both of these strategies can be effective and profitable in doing the job you give then to do. Comparing these two strategies by win loss ratio is a useless exercise.

The last item to forget is the line “More profitable…” that is not the objective. The objective is to build strategies that continue to make reasonable trading returns into the future. Too often the most profitable optimization of a strategy never produces in testing or live trading (but traders are still obsessed with it). A strategy setting with half the optimization profits often emerges like the energizer bunny and keeps on giving (meets the expected value going into the future) and giving and giving….

Today the hybrid strategy is my standard for automated trading. I pack directional, volatility and swing trading into each strategy I build. However, each strategy emphasizes one of these three factors more than the others. But what is most important is trading the correct strategy for the current market conditions. For the last few months my hybrids that emphasize volatility have produced the best.

 

Good question with no easy answer.

(1) What do you mean by "more profitable"? People have many different criteria for selecting from a basket of potentially profitable strategies. One criterion is the volatility of returns. In that case strategy A may be better than B, since B is more of a trend following method and A is shorter-term, both in the relevant time frame of course.

Then, the actual profit will depend on the number of trades and position risk. One serious drawback of B is that the stoploss is not defined when the position is established and position sizing must be based on guesswork. From that PoV, A is better because it allows better risk control and if you use an anti-martingale position sizing method and your success rate is high enough you will never fail.

(2) "Easy to trade" is also relative thing. Some people cannot trade systems that "let the profits run" because they are of the "hit and run" personality type. Others in the case of A will just take the profits but let the losses run. IMO, A must be automated necessarily to work.

Some important, but not all, issues involved in deciding between shorter-term exiting techniques and longer term "let the profits run" type of systems are discussed in this article by an expert in the field of trading system development.