Robert-good point. What I mean by those sentences is that by moving your stop up you are reducing your risk. Perhaps my wording wasn't clear on that. AA-you provide a great scenario. A $90 stock that goes to $95 then back to $90. Obviously in this case it would have been smart to have taken the partial exit at $95 while the opportunity presented itself. However, let us imagine another scenario. A $90 stock that goes to $95, then $100, then $110 then $100, then $90. Yes I know it sounds silly. But as a trader one of the things I try to remember is that *anything* can happen at anytime. In the example I gave, it would have been more beneficial to have simply used the trailing stop loss and exited at the R/S identified in our analysis of the stock or accordingly been stopped out of the trade. Now the question becomes which probability outweighs the other? the chance that it might reverse? or keep going? It depends what kind of trader you are I guess. If you are trying to score high R trades (Tharp's vocab) then you would sacrifice the chance that the stock *might* do what you menioned in your scenario. That is peek out only to then head back. My personal style is to tread water (low negative R trades) and then to score with some high +R trades. If I exit prematurely on the ones that I am right in then I am doing myself a disservice and will in the end only lose money. Hope that clears up my points. Look forward to your thoughts.
I think one overlooked benefit of taking partial profits is the psychological one. For the sake of simplicity, we have 4 scenarios: (assuming a long position) 1) taking partial profits, and the stock continues to go up 2) taking partial profits, and the stock declines 3) not taking partial profits, and the stock continues to go up 4) not taking partial profits, and the stock declines In scenario #1, it's a little bittersweet. We've taken some profits, and our profits continue to build. However, we've given up a little bit of potential profit by selling a partial lot too early. Overall, pretty sweet. In scenario #2, we didn't play it perfectly, but at least it looks like we're going to turn a profit. Scenario #3 is obviously ideal. Scenario #4 can be very damaging psychologically. Here we have a winner, and maybe we'll be lucky to break even. The axiom 'never let a winner turn into a loser' makes sense to me for no other reason than it hurts psychologically to do the opposite. For me, there is nothing worse than letting this happen. IMO, doing this repeatedly can cripple a trader's already fragile psyche. It's worse than exiting too early, it's worse than missing a trade completely. In order to succeed as a trader, you need to have a track record of winners that demonstrate in your mind your ability to trade successfully. For every winner that turned into a loser, subtract about 2 or 3 of those successful trades. At least, that's ben my experience.
Good points MJT. Let me throw one more thought out: Taking incremental profits also gives the trader the flexibility to give the security more room to move. Any futures traders can tell you this can be extremely important. For instance, there used to be a general guideline among S&P position traders that even in a trending market you often needed to use a 50% of profit trailing stop to keep from being stopped out prematurely and having to worry about a reentry. Maximizing the price action mobility in a volatile stock while still keeping the risk mitigated can be especially important to multiday swing or position traders who don't have to luxury to hunker down over a tick chart and T&S scroll all day long. By taking some incremental profits along the way they won't need to feel the need to grind tight stops to preserve your profits and can often manage their stops with less anxiety and more sensibility. Incremental profit taking is also a very important tool in a choppy market as a way of simultaneously mitigating risk AND preserving partial profits since it's more common for stocks to move in your expected direction, hit a resistance zone, fail to break it, and pullback to where you entered than for them to just keep going and going like the energizer bunny. In choppy markets, those using incremental profit taking will more likely come out ahead of those using normal stop management alone (they also won't feel as beaten up by the choppy market). If you've got a fairly good trending market you can probably get by with just normal stop management - if the psychological benefits MJT noted aren't important to you. One more thought in the vein of what MJT was talking about. Especially for lesser experienced traders, learning to actually take profits is as important as learning to cut out and take a loss. Maybe even more so, because while many traders fail because they never learned to cut their losses, there are also many traders who fail because they always let their winners ultimately become a loser. They always say they don't want to take a profit because it can always go higher. Problem with that logic is that it's really just the other side of the coin of "I can't sell now, it could turn around and go back up any minute". The Wall Street axiom of "Always sell too soon" exists for a reason. Profit taking paralysis can be as big a problem as being unable to pull the trigger on a loss. A modification to straight profit taking that I sometimes do is to use a split stop, i.e., when I get to the planned profit taking target I set a moderately tight trailing stop on 1/2 the position and also update the stop on the remaining position as planned. Then price action dictates when/if the profit taking stop executes. That way if there's still more gas in the price action beyond the profit taking target, I can capture much of it with the trailing profit taking stop without losing out on the practical benefits of incremental profit taking. Wouldn't advise that additional complexity for a newer trader who still needs to just learn to execute per a plan and pull the trigger on profit taking and stop management though.
You really should get a copy of Van Tharp's TRADE YOUR WAY TO FINANCIAL FREEDOM. He completely changed my outlook re daytrading,risk management and expected outcome(s) from a trade. The book really opened my eyes in these areas and I'm the better for it. I have no relationship with Tharp so I'm not trying to hype his book for my own financial gain. Simply put, it is a very worth while read and has helped me a lot. I believe it will answer many of the questions you have posted here.. Best regards, Jim.
acknowledge your points re psychology. Yet I must respectfully disagree. Trading is *not* about feeling comfortable. Actually some of the best trades occur when you are extremely UNcomfortable. This is because trading is not a very human thing to do. We love to be part of a group. This is something that our ancestors have taught us and it is in all of us to an extremely high degree. Good trading however must mean that you take the other side (not always but you must be ready to do so when your edge tells you to)This is extremely uncomfortable. So trading is not about comfort. AA-re your point of a choppy mkt and tight stops....either trade with a larger stop or do not trade. Common sense. Here is Tharp's discussion of this topic (Chapter 10): ---------------------------------------------- There is one kind of exit that is designed to get rid of losses, but it totally goes against the golden rule of trading to cut your losses short and let your profit run. Instead, it produces large losses and small profits. This type of exit is one in which you enter the market with multiple contracts and then scale out with various exits. For example, you might start with 300 shares and then sell 100 of them when you can break even on all 300 of them. You might thensell another 100 shares at a $500 profit and keep the last 100 shares for a huge profit. Short-term traders use this type of strategy frequently. On a gut level, this sort of trading makes sense because you seem to be "insuring" your profits. But if you step back from this sort of exit and really study it, you'll see how dangerous this type of trading is. What you are actually doing with this sort of exit is practising reverse position sizing. You are making sure that you will have multiple positions when you take your largest losses. In our example, you'd lose on all 300 shares. You are also making sure that you only have a minimal-sized position when you make your largest gains - 100 shares in our example. It's the perfect method for people with a strong bias to be right, but doesn't optimize profits or even guarantee profits. Does it make sense now? If it doesn't make sense to you why you should avoid this sort of trading, work out the numbers. Imagine that you only take either a full loss or a full profit. Look at your past trades and determine how much difference this sort of trading would have made. In almost every instance when I've asked clients to do this, they become totally amazed at how much money they would have made holding on to a full position. --------------------------------------------- I hope that Tharp Sr. would not take offense at me posting an excerpt from his work. I have only done so with the hope that this would shed some light on our discussion and perhaps motivate others to read his books and consider his concepts which I believe to be excellent.
babak - Tharp is certainly entitled to his opinion, but the most successful professional equity and futures traders I've met all gradually scaled out of their positions as they moved in their favor. Their common approach was to move their positions to low risk as quickly as possible by taking some money off the table and then let the remainder go as far as possible. If they're doing it wrong, we should all be so lucky. As far as being comfortable or uncomfortable when trading - that's pretty much a "to each his own" kind of thing. But the psychology and comfortability factors shouldn't be underestimated as it applies to the large group of retail traders. An experienced trader can control his anxiety and trade inspite of it. Most less experienced traders can't and anything they can do to benefit them psychologically and reduce their natural tendency to react in panic is a clear positive benefit for them - even if that means (possibly) sacrificing some theoretical upside. I'm not even talking about losing vs. winning. Just getting out of say a 10 trade series with some partial profits will do much more for their morale than ending up at breakeven. But again, it's more a factor of what any given trader is comfortable executing. Good luck.
We've reached a good resolution here I think --------- I believe Tharp is irrefutable on this issue mathematically, though for many traders Archangel makes an excellent psychological point. Personally, I trade ala Tharp, he is correct from an optimal expectancy point of view, especially because as an ES trader the really big money is made on the parabolic moves when you have and maintain full positions. This does give up something on the other end ----- not in terms of net profit over a series of plays but win percentage and the psychological comfort of avoiding extended losing streaks and perhaps trading with greater confidence as a result ----- it's a tradeoff (pun intended) each person has to work out for himself, psychology vs. probability, viewing things trading trade-by-trade or seeing trading as an extended series of plays over a much longer time frame.
as far as buy side pros go, something like 2/3s of CTA's, including those with the largest assets under management, are trendfollowers. they scale out because they move size, not to reduce risk... but before they scale out, they scale in - ie their units are built as an inverted pyramid until they have their desired position size. frankly, it beats me how a normal pyramid is supposed to work over time, ie your positions are largest when you lose, and smallest when you win, and particularly so when you are talking about a reduced time frame where you limit your wins as in intraday trading... i'm not saying that it cannot work as apparently there are people here for whom it seems to work, but it is rather baffling, i mean you need to be right what, over 70%?? cheers
I don't see how it's irrefutable mathematically that scaling out of positions is wrong. Sometimes holding onto your entire position will be beneficial. Sometimes it will be detrimental. It would be impossible to prove this one way or the other. It's like asking whether prices tend to move in trends or whether they tend to oscillate. Obviously they do both. If you believe that it's better to not scale out of positions, you probably also believe that prices trend enough of the time to counter the corrections and rallies that occur. If you believe in scaling out, you may see prices as being more choppy. Again, there is an infinitessimal amount of data, and I can't imagine how one would go about proving either alternative to be correct.