Targets vs trailing

[barneydunn]

This is always a tricky subject for traders so what are your thoughts? Is it better to use a target take profit or to trail the stop until stopped out?

There are pros and cons to both of course. I am trading 1 and 5 min charts in the HTF direction and have a pretty solid entry method, most of my trades will go into at least some profit. My problem at the moment is working out the best time to take profit, either with a target or a trail.

I absolutely love the idea of trailing the stop out to infinity as long as the trade keeps going but in practice even that can be hard to do because what looks like a minor pullback against your trade could actually be a trend/momentum reversal. What trailing methods do you use?

A profit target, take profit, makes sense in some ways because at least you should be banking some profit fairly regularly if your entries are strong enough. Of course the flipside to that is that you are capping your profits. How are you going to feel if you take 20 pips/points and it runs 100 in smart order? Then again if you're trailing and it goes 20 but flips back fast and you come out with 10 how do you feel then?

I'd appreciate everyone's views on this?

 

[tomorton]

Great question. The hardest question in trading is when to take profits.

But part of the answer lies outside the frame of your question. the answer is that it depends on the strategy. If your strategy involves buying at the bottom of a sideways range then the rational method to follow would be to put a fixed TP just below the higher boundary of the range. Because once the upper boundary is achieved, the game is over, there is no expectation derived from TA that price will rise higher.

But if your strategy involves buying within an uptrend then you've got the choice between a fixed TP and a trailing SL because it doesn't really matter. If the trend continues after the exit price level is achieved, you just buy in again. If price falls you don't.

 

[barneydunn]

I understand your answer, I should have mentioned I am generally trading with the trend and avoid sideways markets. I'm pretty fussy with my entries so reentering after a take profit is hit is usually not an option hence me wanting to get the best possible exit.

 

[Riddler]

I do both. I trail the stop en route to reaching the TP and like @tomorton suggested I am happy to reenter a position on a stop out provided that the structure remains intact. I rode Peleton downhill but I had to get back in a couple of times after the short squeeze's took me out. But I never (anymore) move the TP so it is critical that I set it at the outset at a level which I am satisfied.

It was only yesterday I finished reading Trading in the Zone by the late Mark Douglas, I listened to the audiobook a couple of years ago already but it was time for a refresher. Once you reprogram your thinking to accept what he calls the five fundamental truths then you don't worry about what you could have taken or what might have been had you did this or that, you take what the market makes available to you and then move on to the next opportunity. Once stopped out or TP is reached you don't need to keep watching the chart, close it and look for the next trade.

Warren Buffet said "always leave something for the next man", that's one of the most useful and important quotes I've heard since I began trading.

 

[tomorton]

I can confess to a psychological preference to closing a long trade at a new high, rather than closing it because price fell back from a new high. So I usually set a TP at a level where I am "impressed" by the price move. This means I'm happy to be out. If the price goes higher than the new high, so be it: the higher and the faster it rises, the sooner we will get a pull-back and I can get in long again.

Likewise, when I have not been setting TP's sometimes I have made a mental note to close a long trade after an unusually bullish price move in a single day.

Another consideration in justifying an exit at a new high might be whether you yourself would enter at this price. If its so high you think it would be sensible to wait for a pull-back, then its hard to believe that other players would do something which you yourself already think is not sensible.

 

[barneydunn]

I do both. I trail the stop en route to reaching the TP and like @tomorton suggested I am happy to reenter a position on a stop out provided that the structure remains intact. I rode Peleton downhill but I had to get back in a couple of times after the short squeeze's took me out. But I never (anymore) move the TP so it is critical that I set it at the outset at a level which I am satisfied.

It was only yesterday I finished reading Trading in the Zone by the late Mark Douglas, I listened to the audiobook a couple of years ago already but it was time for a refresher. Once you reprogram your thinking to accept what he calls the five fundamental truths then you don't worry about what you could have taken or what might have been had you did this or that, you take what the market makes available to you and then move on to the next opportunity. Once stopped out or TP is reached you don't need to keep watching the chart, close it and look for the next trade.

Warren Buffet said "always leave something for the next man", that's one of the most useful and important quotes I've heard since I began trading.

That's pretty much where I'm at right now (tp + trail towards it) but I'm a bit at sea regarding whether I should take smaller profits more regularly or be shooting for the bigger moves. The bigger moves do happen fairly regularly so even from a 1 minute chart you can see 50 to 75 pip moves from a 5 to 10 pip stop which is the kind of risk/reward I like. Of course not every trade is going to do that. I was told by a friend who is consistently profitable on the 1 min chart that it's best to look for what happens most often and just accept that but that's hard to quantify on some of the forex pairs I'm trading and he only trades indices. I suppose more backtesting is the only way and fix a target that I can reasonably expect to be hit more often than not on a good trade. The losers will take care of themselves with the trailing stop, might come out with a loss, a break even or a smaller win but it's the bigger winners that I am trying to maximise that are causing me the issues.

 

[barneydunn]

I can confess to a psychological preference to closing a long trade at a new high, rather than closing it because price fell back from a new high. So I usually set a TP at a level where I am "impressed" by the price move. This means I'm happy to be out. If the price goes higher than the new high, so be it: the higher and the faster it rises, the sooner we will get a pull-back and I can get in long again.

Likewise, when I have not been setting TP's sometimes I have made a mental note to close a long trade after an unusually bullish price move in a single day.

Another consideration in justifying an exit at a new high might be whether you yourself would enter at this price. If its so high you think it would be sensible to wait for a pull-back, then its hard to believe that other players would do something which you yourself already think is not sensible.

That's all good advice, thanks.

 

[Riddler]

That's pretty much where I'm at right now (tp + trail towards it) but I'm a bit at sea regarding whether I should take smaller profits more regularly or be shooting for the bigger moves. The bigger moves do happen fairly regularly so even from a 1 minute chart you can see 50 to 75 pip moves from a 5 to 10 pip stop which is the kind of risk/reward I like. Of course not every trade is going to do that. I was told by a friend who is consistently profitable on the 1 min chart that it's best to look for what happens most often and just accept that but that's hard to quantify on some of the forex pairs I'm trading and he only trades indices. I suppose more backtesting is the only way and fix a target that I can reasonably expect to be hit more often than not on a good trade. The losers will take care of themselves with the trailing stop, might come out with a loss, a break even or a smaller win but it's the bigger winners that I am trying to maximise that are causing me the issues.

Mark Douglas used to mark out 3 TP levels in his open positions. For instance, if the R/R on a trade was 6:1, he would take off a third of the position at 2:1, the other third at 4:1 and then let the rest of it reach the target. Perhaps you could try this method also as it doesn't require you to choose between the two methods you're pondering over, you can do both.

 

[barneydunn]

Mark Douglas used to mark out 3 TP levels in his open positions. For instance, if the R/R on a trade was 6:1, he would take off a third of the position at 2:1, the other third at 4:1 and then let the rest of it reach the target. Perhaps you could try this method also as it doesn't require you to choose between the two methods you're pondering over, you can do both.

Taking partial profits is never something that has sat well with me for some reason. If it goes on and hits your full target you are left feeling a bit short changed. I know that's an issue with my own psychology but that's what it is. I need to just have a good think about it, do some more testing and come up with something I can set in stone to follow. Thanks for the suggestion though, definitely something to consider.

 

[AriaS]

It really depends on the system. Backtests are necessary for deciding about the winning solution. Also it depends on the certain set. One trailing set can be better than TP, and vice versa.