2 for 1 Trading Rule - question regarding this MM tactic

[trendisyourfriend]

This rule is well very simple.

This is a money management strategy to help maximize our profits while minimizing our losses.

SCENARIO I
Let's suppose that you buy 20000 units of EUR/USD (2 mini contracts of 10000 units). You determine that your stop is going to be at -50 pips from your entry point. You are risking 50 pips. Now, if the currency pair goes in your favor for a distance equal to your risk, i.e. 50 pips, you will take 50% of your profits and will leave the remaining 10000 units on the table but without changing the position of your stop-loss.

What does this accomplish? Well, you took a partial profit on half your units once the currency pair moved equal to your positions original stop loss. Now, if you get stopped out on the remaining units you will have lost nothing!

SCENARIO II
You do the same thing but instead of leaving your stop-loss unchanged you move it +50 pips to place it at the original entry point and you don't take 50% of your profits, you let the trade run.

Which strategy do you think is best ? SCENARIO I or II ?

 

[nine]

Neither.

They are both untested heuristics. Often recommended by people trying to give newbies simple solutions (or trying to sound like that while they scam them for dollars) but nothing close to optimal.

The correct answer is to develop a strategy and test it. Said strategy might be close to optimal for a range of contracts or only one. Said strategy might be optimal because it provides the most dollars over a period of time or simply because it attracts the revenue you were seeking.

But anything based on XX pips, Y percentage, or some indicator is suspect newbie bait.

Do you want a formula that works?
Understand the markets. Develop a strategy. Test the strategy. Trade it. Understand yourself. Develop yourself and the strategy. Continue looping.

 

[trendisyourfriend]

Neither.

They are both untested heuristics. Often recommended by people trying to give newbies simple solutions...

Do you want a formula that works?
Understand the markets. Develop a strategy. Test the strategy. Trade it. Understand yourself. Develop yourself and the strategy. Continue looping.

This commentary is too general for my level of experience, i appreciate your reply but i just don't get it. I had the impression those scenarios were used by a majority of traders and were common practice and had possibly been tested to death.

 

[shadowninja]

The idea of closing half was discussed in one book I read (could have been Elder's) and he regretted not doing it a lot sooner as he'd see one of two occurrences:
1) he'd leave it running and watch his profit turn to zero and then he'd get stopped out for no profit cos he'd moved his stop to b/e (even if it had moved up a decent amount)
2) he'd close the position fully, having let it move up a decent amount, only for it to move even further in his direction.

Of course, the best way would be to be able to read the market and know if it had run out of puff but as an amateur, perhaps taking 50% would be a more satisfying method.

 

[nine]

OK. Elder is an excellent author. A trader I do not know. But his advice is about satisficing. About making yourself feel ok. Not about (necessarily) trading well.

It's like the old "be stop."

The problem tiyf is that each of the old "truths" you find about the market was propagated by someone for some purpose. Elder's one is about making yourself feel good. Now, if you have a problem with your trading caused by feeling bad in that situation and you can't find a better way to solve it then its a great rule.

But, each rule worked for one or more people in one or more markets at one time. And only in association with particular entry and exit criteria. No rule works all the time/market/criteria/people.

The good thing to do with them is say "Hmmm ... here's something that x found useful. I wonder if it would work with my strategy?" And test it - for you - with your strategy. Does it make you more effective?

 

[Chorlton]

This rule is well very simple.

This is a money management strategy to help maximize our profits while minimizing our losses.

SCENARIO I
Let's suppose that you buy 20000 units of EUR/USD (2 mini contracts of 10000 units). You determine that your stop is going to be at -50 pips from your entry point. You are risking 50 pips. Now, if the currency pair goes in your favor for a distance equal to your risk, i.e. 50 pips, you will take 50% of your profits and will leave the remaining 10000 units on the table but without changing the position of your stop-loss.

What does this accomplish? Well, you took a partial profit on half your units once the currency pair moved equal to your positions original stop loss. Now, if you get stopped out on the remaining units you will have lost nothing!

SCENARIO II
You do the same thing but instead of leaving your stop-loss unchanged you move it +50 pips to place it at the original entry point and you don't take 50% of your profits, you let the trade run.

Which strategy do you think is best ? SCENARIO I or II ?

In reply I will pose another question. Which one performs the best under your testing (both Backtesting & Forward Testing) ?

 

[Vrothdar]

This commentary is too general for my level of experience, i appreciate your reply but i just don't get it. I had the impression those scenarios were used by a majority of traders and were common practice and had possibly been tested to death.

Just as your original post is far too general to be meaningful.

If you don't try it yourself with your trading rules you'll never know if it works for you. It doesn't matter what experience others have had using these techniques the only way you can possibly know if they'll work for you is to test them very thoroughly.

 

[Bladerunner]

This question does my nut in, it really does

This question does my nut in

My brain cannot get past 2 units in and out

Always been all in all out by discretion, always taken off the table if I think its showing evidence its as earlier poster said...........

running out of puff

many of my good entries will very often test my entry on the 1st retract in the lower tf then move off again for at least a test of my exit

if you scale out on a good un should you scale out the entry if its a bad un ? to keep it square. Your grabbing at the 1st profit, you have doubled your risk at the entry, have you not ?

Think its very hard to test proper

ie close one very quick if market does not move in your favour straight away

how much does it skew risk reward ?

How long do you need to forward test it ?

Can it be back tested if your useing market structure as you Stop profit targets ?

I no if I am - 25 on my main set up its wrong, no matter what rubbish is going on in my head at the time but that information is paid for in live forward trading

does my nut in

Think Nines hit the nail on the head, or at least thats close to my thoughts = loop over and over and optimise by experience

personally I have always found running profits past anything other than close targets very hard

Have a paper one in the ftse at the moment and I have allowed it to go a bit red from + 14, getting emotional about pretend money here, can not see how this is a good trade even if it later turns

just does not feel right, giving a new approach a trial run so have to give it time



That paper profit is mine


watching this thread will be interesting to see where it goes .........


Andy

 

[trendisyourfriend]

Forward Testing

I am sorry, i have no idea what forward testing means. Maybe you mean using some random datas but random is no more good than past datas. My question is relatively simple and i don't think i need to give a specific set-up to make it clearer. What i understand is no one seems to use this kind of scaling tactic to exit a trade while it's mentionned on almost every sites. Strange, indeed !

 

[Vrothdar]

I am sorry, i have no idea what forward testing means. Maybe you mean using some random datas but random is no more good than past datas. My question is relatively simple and i don't think i need to give a specific set-up to make it clearer. What i understand is no one seems to use this kind of scaling tactic to exit a trade while it's mentionned on almost every sites. Strange, indeed !

Forward testing is just another way of saying paper trading.

You question, which of the two is better, really isn't a simple question. The reasons for it not being a simple question have been explained in many posts before this one. To summarise: There are too many unknowns to answer with a straight forward "this is better than that". Depending on what these unknowns are, in your circumstances, the answer will change.

The simplest answer is that the only way you will know which is best (or whether either of them are of any use at all) is by testing them. Most people would suggest you start by back testing, then forward testing and finally by taking it live with a relatively small amount of capital.

There are people that do use these tactics - I've no idea whether or not those traders are, on the whole, successful. Why do you read about them on almost all sites? - that's all in nine's first reply.