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Trader Q&A - Trade Management Question: I read an article by Mike Reed where he states if a trade does not go your way immediately get out, not waiting for your hard stop to take you out.
I looked through my last 20 trades and it appears my profit factor would have improved applying this method, sell 1/2 if price reverses below entry, sell the second 1/2 at the initial/trailing stop.
I know this will lower the win % however increase average win/loss ratio.
Just wanted to know if you have tested this, and if and how you pyramid a trade?
C Answer: Hi C, In my opinion this is a great exit strategy, and one that I do use myself.
It is important to note that this exit strategy is not about exiting out of fear of loss. In fact the exit should not be influenced by any emotion. Rather it is based on knowing that the setups Mike and I use are such that price should move in the required direction fairly quickly. If that doesn't occur, then it's an indication that either we were wrong with our setup, or something has changed in the market and the setup has lost it's edge. In either case, it then makes no sense to just hold on to the trade hoping, wishing and praying for it to continue to the target rather than the stop loss. If the trade setup no longer provides it's predefined edge, get out. Preservation of capital is the number one rule.
Please note though that I am not totally mechanical in my exit strategy (such as your suggestion of exiting half at breakeven, and allowing the remainder to retain the original stop/trailing stop). I am very aggressive with the first part of my trade, and once a small way into profit I won't allow it to go negative. The second part is sometimes the same, but often is given a bit more time to prove itself, unless price action indicates I was totally wrong. This doesn't mean the second part won't also be exited before hitting the hard stop.
Another important point is that just because I've exited doesn't rule out the possibility of reentry, if the setup shows itself again. How does this affect winning percentage? Well, like all stats, this can be distorted to show whatever 'truth' you wish. For me, it comes down to how I count the breakeven trades. If I consider them a win, then it will increase my winning percentage, but decrease the average size of wins. If I counted them as a loss, then I'd have a very low winning percentage, but an average win much greater than average loss. I prefer to just not count them at all. Then I'm comparing trades that actually win, vs those that actually produce a loss. This still shows a higher winning percentage, and a higher average win than average loss. Mike's approach is not totally new. It's basically what's referred to as a 'time stop'. If the trade does not move as expected within a certain time, plan your exit. The videos at the following link will provide a bit more info on how I exit: http://www.yourtradingcoach.com/Videos-Risk-Management/The-Importance-of-Exit-Strategy-Vid-1.html
Whether this strategy works for you can only be determined through testing and trials. For me it works, that doesn't mean it's right for everyone. In fact, as the videos state, it's really optimized to be the best fit for my psychology, rather than what produces greater profits. Re pyramiding - I don't like it, but that's just my style.
Hope that helps,
Lance Beggs |
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