# Trading discipline: Letting your winners run



## Neutral (30 June 2008)

The discipline of trading is something I am still trying to master, as I'm sure many of us 'novices' are in the same boat. My dilemma is limiting my losses from profits. My current mentality is something like, "Oh well, at least the losses have not eaten into my initial capital". My reasoning behind this is that I value the stock beyond so called 'short term' reversals. But like the rest of us, I cannot predict the future and a short term reversal may turn into a long term blunder. 

Too many times now I have taken profits on market reversals to see the stock regain and move well beyond my initial sell trigger. On the flipside, I have also *not* realised many profits and let the SP slide (but never below my initial capital). This is because I am still trying to work out this aspect of my trading.

I have seen many experienced contributors on this forum write, "Protect your capital & stick to your plan". But also write "Let your winners run and cut your losses short". This makes perfect sense to me, and I try to trade by these very principles. The hardest part for me though is, *when* to actually sell?  

As a trader or short term investor, how do you protect your profits without selling out too soon? For example, if you saw a 10% gain, and the market reversed 5% leaving you now with only a 5% gain, would you sell, or let it go in the 'hope' the SP rallies?

Does this require a discipline of 'set target profiting' (ie, a 10% gain will trigger your sell - you are happy with this and move on, even if the SP goes beyond this) Or, as per the mantra, "Let your profits run". If the latter, do you allow for some recede in SP or do you bail and realise your profits?

*When* to take profits is something I haven't worked out as you can tell. Like the rest of us, my 'plan' is to make as much money as possible. LOL.  But I think sometimes greed can get in the way of this very so called 'plan'. Anyone care to post their individual successful trading plans? (ie, when do you take profits?)

Sorry for the detailed post and all the questions. 

Thanks in advance 

Neutral


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## tech/a (30 June 2008)

*Re: Trading discipline. Letting your winners run.*

A complex topic one which can be split into many time frames and "styles"

But one thing I will point out.
Cutting losses from open profit can be negated to some extent if trading short term---by simply re entering if you sold out to prematurely.

Just something to think about.


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## vine (30 June 2008)

*Re: Trading discipline. Letting your winners run.*

Hi Neutral,
Great question for all of us new traders. I bought 10 K UMC at $1 and sold at $1;30 when it retreated slightly. I still got a 30% gain which is great but  look at the price now. Anyway would love to gain any expert insight from all of who gone through this process.  
Vine


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## Lucky_Country (30 June 2008)

*Re: Trading discipline. Letting your winners run.*

To trade one must rethink why the share was bought in the first place.
Was it bought to reach a percentage gain, a monetry profit, or until a project is complete and running the way it had been portayed.
What is your feeling when it reaches those trigger points and has the fundamentals changed ?


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## Wysiwyg (30 June 2008)

*Re: Trading discipline. Letting your winners run.*



vine said:


> Hi Neutral,
> Great question for all of us new traders. I bought 10 K UMC at $1 and sold at $1;30 when it retreated slightly. I still got a 30% gain which is great but  look at the price now. Anyway would love to gain any expert insight from all of who gone through this process.
> Vine




I have done this scenario countless times on multi-baggers and never re-enter.I never re-enter for fear of giving back profits.It is a very real psyche issue with me.


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## marklar (30 June 2008)

*Re: Trading discipline. Letting your winners run.*

Interesting question and somewhat like what I'm facing, I guess the question to ask yourself is "why are you investing on the stock market?" is it short-term gain? long-term growth? play with speccies looking for a 10-bagger? something else?

If you're investing your own dollars that you can afford to lose (like me) does it matter if you get out of a stock too early, provided you make a profit?  Two examples:
1. I got in on YML (now BRM) at 20c, rode it up to $1.60 and got stopped out at $1, it's now around $2.50.  I'm happy I made a good profit.
2. I got in on HLX at 17c, rode it up to it's peak (49c-ish?) and got stopped out at 34c, it's now at 25c.  I'm happy I made a good profit.

Both followed my plan, both hit stops on their way down but still made me a profit.  These two more than make up for the $ I lost on BHP, INL, et al., I'm ahead for the year and now owe the ATO more money 

m.


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## Geffro77 (30 June 2008)

I'm just starting out and this is something I've had problems with too.

At the recent Power Setups Seminar Nick Radge suggested using a simple trailing stop which was to use the lowest low (or highest high when shorting) in the last x days.

Does anyone use this method? If so, have you found it to be effective? 

If not, what types of trailing stops are popular out there??


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## MichaelD (30 June 2008)

Neutral said:


> Too many times now I have taken profits on market reversals to see the stock regain and move well beyond my initial sell trigger.




Reverse your thinking.

Being whipsawed out of a position is just part of trading and doesn't matter in the scheme of things.

I can proudly state that I have been whipsawed in and out of most of the ASX300.

I can proudly state that I have taken a stop loss when triggered only to have the stock take off again without me many a time.

Doesn't matter at all.

What REALLY matters, however, is;
1. When a stock HAS taken off, I have let it run, and
2. I have never allowed a small loss to turn into a big loss

The combination of these two factors basically guarantees that you will make money in the long run.

If you allow a small loss to turn into a big loss, you will destroy your trading capital. No capital means you can no longer play the game.

Most of the successful traders here at ASF (there are far less than you would think) happily function in the 40-50% win rate with their trades. We are wrong MORE OFTEN than we are right.


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## tech/a (30 June 2008)

Michael sums it up pretty well.

I'll just add 2 things.
Short term traders will work on higher win rates and lower R/R.
They are likely to pyramid quickly.
So their trailing stops are likely to be much tighter than a longer term trader.

Longer term traders work on higher R/R so their Exits will be governed by a much looser exit mechanism.


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## IFocus (30 June 2008)

To start with 

You can only ever control your losses and never your profits.

Determine your time frame and method.

Determine the current markets time frame. They both need to be the same.

If in long trending bull market your time frame maybe longer

If in a choppy market your time frame maybe shorter

If going short set price targets.

Test your method extensively 
Test your method extensively
Test your method extensively

Did I mention about testing...............


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## >Apocalypto< (30 June 2008)

This was a real problem for me.

How I solved it, by profit targets.

when I take a trade I open it with two lots. 

Trade 1 SL 10 pips TP 10 pips.

Trade 2 SL 10 pips.

This is my formula that I always stick to. I never change it. Trade life, once the first TP is hit I move trade two to BE and let the market decide what happens. If It moves in my favor I adjust my stop up and let it run till I am stopped

What this taught me is to be disciplined and not to think as the thinking is all taken care of in my plan.

helped me a lot in taking the emotion out of when to take profits.

see chart ** please note that is not a real life trade only a example****

Cheers


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## nizar (30 June 2008)

Neutral said:


> The hardest part for me though is, *when* to actually sell?




To be honest with you this is the question I couldn't answer by any means other than extensive research and testing.

And read what Michael D/tech/IFocus wrote.
They know their stuff. No need for me to repeat it.


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## Trembling Hand (30 June 2008)

Still the same old discipline problem or a theme of...... greed, fear, mistake, right, wrong, controlled, impulsive, missed opportunity, loss, stupidity, head fade and on and on.

If I had to be brutally honest I would guess that the real cause is from two things or a combination of the two. 

1. You have a small capital base that you NEED to work hard. Lets face it if you are swinging $500,000 you don't need much of a gain in your odd picks to make some good $$ as long as you have some sort of favourable R:R. Even a small expectancy you will be happyish with. But if you are swinging $50,000 every loss is a step closer to failure and every winner NEEDS to be a good one. On top of that every one that gets away is another lost opportunity and further reason to beat yourself up over. Not to mention the need to be "in" the market in case you do miss the next big one. 

2. As you haven't had experience yet in what is successful every loss or lost opportunity or silly trade is a hit to your confidence/subconscious/mental well being or ideal of the "gun trader" vision you have. If you do know what you can achieve with real past results every mistake is just that a mistake not something that will destabilize your core. 

The answer is unfortunately have a huge capital base. If you don't have that then you MUST remove the $$ goals and shift your focus to expectancy. Which ironically is harder to do the smaller your capital .


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## MichaelD (1 July 2008)

*Re: Trading discipline. Letting your winners run.*



tech/a said:


> ...by simply re entering if you sold out too prematurely.




There's a big psychological block in re-entering a position that you've just exited for many people. The stock has hurt you once, making you gun-shy next time. Of course, that's inevitably the time it takes off for the moon without you.

In one way, trading a limited universe is something of an answer to this psychological hurdle - if you're in and out regularly of an instrument, you'll get used to both losing and winning with the instrument and it won't hurt any more.

I personally have had this scenario crop up a few times - I've duly exited when a stop loss was hit only to have a trade entry signalled quite soon thereafter in the same instrument.

Since I view each trade entry as having a 60% chance of losing and a 40% chance of winning, I simply view each stop hit as being one step closer to my next outlier winner and back in I go.



tech/a said:


> Short term traders will work on higher win rates and lower R/R.



I used to agree with this statement, but I'm not so sure any more.

Anecdotal piece of evidence #1: For the last few months I've been paper and trial trading a short term system with a 50-55% win/loss ratio. The system has been performing to specification, and basically broke even over the test period. There was a strong sense from the market action I was observing that I should have been letting the winners run longer, so I have now gone back and analyzed the effect of an exit which lets the winners run more whilst still clamping down on the losers very quickly. Result? "Only" a 40% win rate, but a DRAMATIC increase in the capture of outlier profits over the same time period - from break-even to 25% return over the same time period in fact. The next 30 trades of the system should show whether this is just curve-fitting or whether my observations have validity.

Anecdotal piece of evidence #2: Radge's Power Setups claim a 40% win-loss ratio and appear to be highly profitable. These are short term trades.

Anecdotal piece of evidence #3: You yourself at one stage during the terminal phases of the bull market short term traded the speccies aggressively with quite impressive results, again at a 40% or so win % if I recall correctly.

Anecdotal piece of evidence #4: I've trialled many, many short and long term systems. I've trialled profit targets. I've trialled intraday stops. Over all time frames (intraday, 1-2 days, years) I am getting the impression that the most profitable systems are the ones which allow capture of the outlier profits whilst still controlling the losses. These systems all seem to produce win % of around 40%.


This does not mean you can't design a profitable system with whatever win % you want. All I'm saying is that I keep coming back to this 40% or so win rate as seeming to be somehow in tune with the market. Whenever I vary this, particularly to get a better win %, I seem to hurt expectancy, not help it. Maybe it's just some sort of mathematical sweet spot for expectancy.


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## Neutral (1 July 2008)

Great advice guys (& girls?)... keep it coming!  Admitedly, my psychology side of things is not down pat yet. Everyone trades a little differently. At the end of the day I have made more than I have lost by sticking to preserving my capital at all costs. It took me a few losses to learn that one!  But overall my wins have been miniscule and few and far between. It's just upsetting to see those miniscule wins turn into big wins if I'd stayed in. I tried doing it this time around when I was up again on a stock. Usually I would have sold and taken the profit, but my experiences with selling out too soon told me to stay in and ride out the reversal for a change. Thing is....it didn't go back up!  Most disappointing to say the least   But...if I had sold when I would have in the past, I would be happy even if the SP went up further. At the end of the day I still make a profit right? Instead I'm the opposite because I didn't sell. LOL. But maybe more importantly....I tried a different approach. Still, it's hard to learn anything from this. Maybe I should put in tighter stops and re-enter if I see another entry point? I don't know!

TH, as expected you've hit the nail on the head. My capital isn't huge, and therefore taking 5-10 trades at once just ain't worth the effort as brokerage can really cut into any profits. In saying that, I don't have a real set figure for the amount of trades I take. I just invest as I see it. I mostly do a lot of back testing & paper trading to try to be sure with my real $$. I know some are adverse to this style, but I simply don't have the capital to spread so I really have to try to make my money work.

Out of curiosity, what sort of stops % wise are you guys using? I'm using about 12% for trailing and 5% on set-up. Maybe I should tighten my trailing?

Cheers

Neutral


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## tech/a (1 July 2008)

*Re: Trading discipline. Letting your winners run.*



MichaelD said:


> There's a big psychological block in re-entering a position that you've just exited for many people. The stock has hurt you once, making you gun-shy next time. Of course, that's inevitably the time it takes off for the moon without you.
> 
> In one way, trading a limited universe is something of an answer to this psychological hurdle - if you're in and out regularly of an instrument, you'll get used to both losing and winning with the instrument and it won't hurt any more.
> 
> ...




It is a shift in thought process.
I also find making it mechanical as in an alert monitor for a new trade is best for me.




> I used to agree with this statement, but I'm not so sure any more.
> 
> Anecdotal piece of evidence #1: For the last few months I've been paper and trial trading a short term system with a 50-55% win/loss ratio. The system has been performing to specification, and basically broke even over the test period. There was a strong sense from the market action I was observing that I should have been letting the winners run longer, so I have now gone back and analyzed the effect of an exit which lets the winners run more whilst still clamping down on the losers very quickly. Result? "Only" a 40% win rate, but a DRAMATIC increase in the capture of outlier profits over the same time period - from break-even to 25% return over the same time period in fact. The next 30 trades of the system should show whether this is just curve-fitting or whether my observations have validity.




Your tilting the R/R in your favor. Lowering loss increasing return. Increasing your 40% win rate will see a dramatic result when coupled with the above.
Even 40%-50% will see dramatic results.



> Anecdotal piece of evidence #2: Radge's Power Setups claim a 40% win-loss ratio and appear to be highly profitable. These are short term trades.



But as you'll note he tilts the expectancy in his favor---your suggestions above help even further.



> Anecdotal piece of evidence #3: You yourself at one stage during the terminal phases of the bull market short term traded the speccies aggressively with quite impressive results, again at a 40% or so win % if I recall correctly.




My journey isnt dis-similar to your own and my research and implementation of improvement have been very similar to yours.



> Anecdotal piece of evidence #4: I've trialled many, many short and long term systems. I've trialled profit targets. I've trialled intraday stops. Over all time frames (intraday, 1-2 days, years) I am getting the impression that the most profitable systems are the ones which allow capture of the outlier profits whilst still controlling the losses. These systems all seem to produce win % of around 40%.




I agree however I'll also point out that the static nature of systems (IE they must conform to a set of parameters) means that the in felxability---whilst positive in return doesnt allow analysis to be applied in your favor---simply because in doing so you negate the rules.
However you can apply all the improvements needed in tilting the profitability in your favor at anytime by trading with discretionary rules. This I have found is the only way to make those improvements which capture a much better piece of the pie.




> This does not mean you can't design a profitable system with whatever win % you want. All I'm saying is that I keep coming back to this 40% or so win rate as seeming to be somehow in tune with the market. Whenever I vary this, particularly to get a better win %, I seem to hurt expectancy, not help it. Maybe it's just some sort of mathematical sweet spot for expectancy.




System wise I agree.
However we can manipulate expectancy easier using discretionary methodology. For example a 10:1 return on a trade will have a massive bearing on a method which returns on average 1.5-2:1 R/R.
A system wont capture this---generally (short term) however the brain computer can see it at times and allow this to happen.

Ah the Challenge of this business--love it and embrace it!


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## Trembling Hand (1 July 2008)

Tech/a I don't know about that higher win rate for shorter time frames.
I scratch 30% of my trades. Doesn't help my % winners much but it does ensure I can be there at the end of the day still punting away and not being taken out by my daily stop.



tech/a said:


> Ah the Challenge of this business--love it and embrace it!



 yes I agree with that thou. Totally.


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## MichaelD (1 July 2008)

*Re: Trading discipline. Letting your winners run.*



tech/a said:


> A system wont capture this---generally (short term) however the brain computer can see it at times and allow this to happen.



Now this I am coming to strongly disagree with.

BY FAR the best trades both in backtesting and in real time I have taken in the last few months are the ones I would have run away screaming from trading discretionary because the chart looked so awful.

I call it my "reverse gut instinct" - I take the trade, SURE that it will lose money...and wham, it makes money.

I'll even go so far as to postulate this; if you're trading at a win % much over 50% then you're missing out big time because of missed opportunities. Sure you're feeling good about your high win % and your clever analysis...but it ain't about that, it's about who takes the most money out of the market at the end of the day.


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## tech/a (1 July 2008)

*Re: Trading discipline. Letting your winners run.*



MichaelD said:


> Now this I am coming to strongly disagree with.
> 
> BY FAR the best trades both in backtesting and in real time I have taken in the last few months are the ones I would have run away screaming from trading discretionary because the chart looked so awful.
> 
> I call it my "reverse gut instinct" - I take the trade, SURE that it will lose money...and wham, it makes money.




Your simply following you system. Its tested to perform to your satisfaction.
Doesnt change my observation though. Your not making a discretionary decision. You dont have to.



> I'll even go so far as to postulate this; if you're trading at a win % much over 50% then you're missing out big time because of missed opportunities. Sure you're feeling good about your high win % and your clever analysis...but it ain't about that, it's about who takes the most money out of the market at the end of the day.




I disagree with your postulation.
I can have a 70% win rate and still have a high R/R.
You've missed nothing.
If I made 10 trades a year all multi baggers,Ive not missed opportunity.
Your presuming high win rate = massive numbers of trades.


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## MichaelD (1 July 2008)

*Re: Trading discipline. Letting your winners run.*



tech/a said:


> Your simply following you system. Its tested to perform to your satisfaction.



Actually, what I did was to add a non hindsight flag which indicated a GO/NO GO to the trade based on the chart at entry. i.e. I TESTED discretionary versus non discretionary as a filter. I was testing my belief that a discretionary component to the system would add an edge - it remarkably did exactly the opposite.

Discretionary MASSIVELY underperformed systematic. This was a consistent observation. Discretion kept me out of many of the outlier winner trades.



tech/a said:


> I can have a 70% win rate and still have a high R/R.
> You've missed nothing.
> If I made 10 trades a year all multi baggers,Ive not missed opportunity.
> Your presuming high win rate = massive numbers of trades.



Not at all.

If you take 10 trades @ 70% win rate with a R:R of 4:1 and I take 30 trades @ 40% win rate and R:R of 3:1 - who comes out ahead?

You'll feel better psychologically about your 70% win rate and how clever your analysis is, but I'll have more money.


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## tech/a (1 July 2008)

*Re: Trading discipline. Letting your winners run.*



MichaelD said:


> Actually, what I did was to add a non hindsight flag which indicated a GO/NO GO to the trade based on the chart at entry. i.e. I TESTED discretionary versus non discretionary as a filter. I was testing my belief that a discretionary component to the system would add an edge - it remarkably did exactly the opposite.




Would be dependant on what that discretionary filter was.



> Discretionary MASSIVELY underperformed systematic. This was a consistent observation. Discretion kept me out of many of the outlier winner trades.




We have contrary results as Discretionary trading has placed me in outlier moves particularly short term 50% plus moves more often that Systems trading,infact I cant remember a 50% move in less than a week with any of my systems.---but that may have more to do with the system than Discretionary V non Discretionary.




> Not at all.
> 
> If you take 10 trades @ 70% win rate with a R:R of 4:1 and I take 30 trades @ 40% win rate and R:R of 3:1 - who comes out ahead?
> 
> You'll feel better psychologically about your 70% win rate and how clever your analysis is, but I'll have more money.




True but now we are talking of trade frequency not win rate.
If I take my 10 trades in 2 weeks and you take 30 in 6 weeks I'll be wearing the smile.


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## nizar (1 July 2008)

Battle of the heavyweights!
Keep it coming guys


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## alfaracing (1 July 2008)

I thought this was the beginners lounge?

Can some one tell me if i can set up a stop loss on comsec or is it a program i need to purchase?

thanks for starting this Neutral i did get some good stuff from some of the responses.


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## Neutral (1 July 2008)

alfaracing said:


> I thought this was the beginners lounge?
> 
> Can some one tell me if i can set up a stop loss on comsec or is it a program i need to purchase?
> 
> thanks for starting this Neutral i did get some good stuff from some of the responses.




Hi Alfa. Yes you can set up Stop Losses on CommSec. This is also who I use. You have to pass a short multiple choice test first. You can find the link on their website.

Neutral


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## MichaelD (1 July 2008)

*Re: Trading discipline. Letting your winners run.*



tech/a said:


> True but now we are talking of trade frequency not win rate.
> If I take my 10 trades in 2 weeks and you take 30 in 6 weeks I'll be wearing the smile.



But that's exactly my point.

You are taking 10 trades in 2 weeks and getting a 70% win rate. You're getting the 70% win rate which makes you feel good because you're discarding many trade entries since they don't meet your setup/entry criteria. I then come along and trade much the same way, except I lower my standards for the entry. All of a sudden I'm taking 30 trades in the same time frame at a 40% win rate and a lower R:R and MAKING MORE MONEY.

i.e. Win rate is inversely proportional to trade frequency all else being equal.

I postulate that if you relax a given set of trade entry parameters you will;
- lower win rate
- increase trade frequency
- lower Risk:Reward ratio
- MAKE MORE MONEY

Think outside of the box. It ISN'T about being right.


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## alfaracing (1 July 2008)

> Hi Alfa. Yes you can set up Stop Losses on CommSec. This is also who I use. You have to pass a short multiple choice test first. You can find the link on their website.




Thanks Neutral i will have a look at commsec tomorrow. I wish i new about these stop losses 6 months ago. I may have saved some of my capital ie MQG (mac bank) am now down 48pc. Thats just one in my RED portfolio started 14 months ago.

Lucky ive got money to burn NOT good night

PS i did read some good stuff on one of the threads on stop losses


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## diliff (2 July 2008)

*Re: Trading discipline. Letting your winners run.*



MichaelD said:


> Actually, what I did was to add a non hindsight flag which indicated a GO/NO GO to the trade based on the chart at entry. i.e. I TESTED discretionary versus non discretionary as a filter. I was testing my belief that a discretionary component to the system would add an edge - it remarkably did exactly the opposite.




I know that i'm a bit late to this discussion and the question is slightly off-topic, but I've seen a lot of people talking about how important testing is to a trading strategy. So far my (limited) day trading has been a combination of educated guesswork about support lines, channels, and momentum, but I'm interested in putting together a more concrete strategy and obviously testing is part of that. There doesn't seem to be a lot of helpful information out there about exactly how you go about doing testing. 

I know I'm opening up a can of worms that deserves its own thread (and no doubt has many threads already) but I'll ask now, as well as have a good search through the old threads: do you do it in real time with paper trades, or do you generally back test historical data? And if you back test, how exactly do you get the data? And what software do you use to test it? And by you, I mean what do those in this discussion typically do, not asking what I could or should do - that said, if you do have advice, I'm all ears since I'm literally starting at the beginning here. Presumably I could do either, with backtesting you're running the risk of the 'rules' of the game changing over time, and with real time paper trade testing, you're limited in that you have to wait a certain amount of time before you can determine the results of the test! So as I see it, there is potential for each, but I'm interested in more of the practicalities of how YOU guys do it. Not asking for your trade secrets, just some advice on where to start and why.

I'm assuming if you're going to test a largely mechanical strategy, you need to code the testing with a pretty complicated set of algorithms and rules? How does that work? I suppose Testing 101 is what I'm looking for.  Both a brief summary of the theory but mainly how to do it in practice.

I'll take it to a separate thread if I've hijacked this one.


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## tech/a (2 July 2008)

*Re: Trading discipline. Letting your winners run.*



MichaelD said:


> But that's exactly my point.
> 
> You are taking 10 trades in 2 weeks and getting a 70% win rate. You're getting the 70% win rate which makes you feel good because you're discarding many trade entries since they don't meet your setup/entry criteria. I then come along and trade much the same way, except I lower my standards for the entry. All of a sudden I'm taking 30 trades in the same time frame at a 40% win rate and a lower R:R and MAKING MORE MONEY.




No arguement if your talking indentical timeframes and my higher R/R doesnt catch up to your trade frequency and lower R/R.
Id suggest however that a 70% win rate would suggest a lower R/R---in general terms and Low trade frequency would not be common---More commonly a higher trade frequency than those methods with lower win rates. We can both postulate combinations which would out perform each others.



> i.e. Win rate is inversely proportional to trade frequency all else being equal.
> 
> I postulate that if you relax a given set of trade entry parameters you will;
> - lower win rate
> ...




Cant agree with this statement.
-Lower win rate--yes--and no--maybe not
-Increase trade frequency --no---the exact opposite.I can have a method which has a high win rate picking up 1.5:1 R/R and trading 30 times a day.
-Lower R/R---yes---and no--depends on a number of things particularly exit,stop and trade management.
With a higher win rate I can have a lower R/R.
-Make more Money--not necessarily.



> Think outside of the box. It ISN'T about being right.




Agree but its not about being random either.
For example I could set you a universe which you could never profit from.
I could set you entry parameter which would NEVER profit regardless of trade management.
Sound or even spectacular Money Management wont turn a flawed methodology into a profitable one.

*On Systems* 
Amibroker is the Cheapest and best value for money. If you cant code your ideas there are people you can pay to do this.
I use Metastock and Tradesim combination.
As for Systems trading and Developement 101
Howard Bandy Quantitive Trading Systems is a good place to start although you'll need a mathamatical bent--- lots of time and patience.


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## diliff (2 July 2008)

*Re: Trading discipline. Letting your winners run.*



tech/a said:


> *On Systems*
> Amibroker is the Cheapest and best value for money. If you cant code your ideas there are people you can pay to do this.
> I use Metastock and Tradesim combination.
> As for Systems trading and Developement 101
> Howard Bandy Quantitive Trading Systems is a good place to start although you'll need a mathamatical bent--- lots of time and patience.




I'll check it out. I had brief look at his website and there is a PDF file of the contents pages - looks quite practical, even having a chapter for Amibroker, which is nice. Theory is all well and good but not much use if you can't use the information in a practical way.

That said, is testing the be all and end all? I've seen plenty of traders who claim they use nothing more than their own intuition (and obviously experience too!) to identify when to enter and exit trades... Would you still consider this a valid method of trading? I suppose any method that makes money is valid, but do you think can reliably be done or is it asking for trouble?

Reason I'm asking is that I'm still trying to 'find my style' and am open to investigating all options and strategies. Obviously intuitive trading sounds attractive - less dry reading, more edge-of-your-seat decision-making, etc, but also a bit more prone to emotional involvement at the expense of rationality. 

I consider myself a fairly stable and rational person but I admit that I have made some bad decisions before, having held onto a stock for far longer than I should have. In this case it was because I hated the idea of breaking even on the sale but then going into the red on brokerage (am currently using Westpac Broking with around 0.03% commissions - more than twice as much as IB I believe). It was a big error or judgement and I watched the stock drop about 20% over the course of a couple of days - about half way through I figured it had gotten far too late to sell so I held on waiting for an inevitable recovery, which did come, but looking back, theres still no reason not to sell a freefalling stock, because has been mentioned in this thread, you can always pick it up at a lower price later on and save yourself significant losses. So I learned my lesson on that one. 

I suppose I'm answering my own questions here. Different styles of trading for different people - all have the potential to work and the potential to fail miserably.


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## tech/a (2 July 2008)

Best answered this way.

How do you know that your "Idea or Plan" is going to be profitable before you trade it?

If you cant answer that then you should find out what makes trading profitable.
Michael and I have been discussing that at length above.

You can trade without systems testing but you cant trade profitably without knowing what it is that will ensure profit!


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## diliff (2 July 2008)

tech/a said:


> Best answered this way.
> 
> How do you know that your "Idea or Plan" is going to be profitable before you trade it?
> 
> ...




Well, right. Obviously there are fundimentals, trends, volatility that all make trading profitable. I see your point though, obviously you have to at least have some sort of idea or prediction about what is going to happen and when, and then execute your trades accordingly and pull out if you don't see what you expected to see happen (within reason). 

I understand that, but I suppose we've all been saying is that you can't always predict it accurately, and when it doesn't happen as planned, you have to be displined enough to follow through and cut your losses short, right?


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## tech/a (2 July 2008)

diliff said:


> Well, right. Obviously there are fundimentals, trends, volatility that all make trading profitable. I see your point though, obviously you have to at least have some sort of idea or prediction about what is going to happen and when, and then execute your trades accordingly and pull out if you don't see what you expected to see happen (within reason).
> 
> I understand that, but I suppose we've all been saying is that you can't always predict it accurately, and when it doesn't happen as planned, you have to be displined enough to follow through and cut your losses short, right?





No I'm actually not saying that.
Profitability isnt about analysis.

Nothing to do with prediction.
*All about skewing the numbers in your favor.*
Michael and I are talking about ways in which this can be achieved.

Its a long road and not something that can be answered easily in a few lines.
Its about what you do when your right and what you do when your wrong.
Not how you are right or why you are wrong.
Seems like we are speaking in riddles when infact when you see it it is very clear.

Gotta go.


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## Trembling Hand (2 July 2008)

diliff said:


> There doesn't seem to be a lot of helpful information out there about exactly how you go about doing testing.
> 
> do you do it in real time with paper trades, or do you generally back test historical data? And if you back test, how exactly do you get the data? And what software do you use to test it?
> I'm assuming if you're going to test a largely mechanical strategy, you need to code the testing with a pretty complicated set of algorithms and rules? How does that work? I suppose Testing 101 is what I'm looking for.  Both a brief summary of the theory but mainly how to do it in practice.




For day trading the best software is EXCEL. I do all my testing with it. I don't use it to test trades but rather to find stats about how the market moves and reacts. With out some idea of what moves the market and the probabilities you are lost. 



diliff said:


> Well, right. Obviously there are fundamentals, trends, volatility that all make trading profitable. I see your point though, obviously you have to at least have some sort of idea or prediction about what is going to happen and when, and then execute your trades accordingly and pull out if you don't see what you expected to see happen (within reason).
> 
> I understand that, but I suppose we've all been saying is that you can't always predict it accurately, and when it doesn't happen as planned, you have to be disciplined enough to follow through and cut your losses short, right?




All you need is reoccurring patterns that you can trade with favourable R:R. in day trading there are many and all it requires is screen time and data collection (hint chart printing works well here) to recognise them.

And another hint most of the tradable patterns are not the text book ones.


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## MichaelD (2 July 2008)

*Re: Trading discipline. Letting your winners run.*



tech/a said:


> Agree but its not about being random either.




Well, now there's an interesting topic in itself. I'm sure you'll never agree with this, but IMO trend following AND analysis based trading (Elliot, VSA, macro pattern recognition, et al) IS basically random and relies more-or-less totally on trade management to succeed. The best trade managers are those that make the most money.

Following on from this belief comes my 40% construct: allow a good trade manager to manage more trades in a given time frame and they will make more money. To allow them to manage more trades, they need to relax their entry criteria if they are at 50%+ win rate. Relaxing their entry criteria will lower their win %.

I believe there is another layer to the onion - where the REAL edges are found, not the illusory ones provided by analysis. I believe this is where the mythical 1000% traders operate, the "5% of the 5%". There are very few of these - only two to my knowledge have ever posted to ASF (I'm not one of them...yet).



			
				diliff said:
			
		

> I suppose Testing 101 is what I'm looking for.



1. Think up a trading method that you think will work. WRITE IT DOWN IN FULL. Universe, Entry, Exit, Risk Management, Money Management. Everything about how the system will operate.
2. If it is capable of mechanical coding, use a trading simulator to figure out if it worked in the past. Note that complexity does not equate with profitability - usually the opposite. I use TradeSim+MetaStock, but AmiBroker can also be used and TradeStation is another in this field.
3. If you can't use a trading simulator for your system either; a/ simplify it until you can, or b/ hand backtest it on at least 30 trades - very time consuming to do this properly without introducing a bias.
4. If the backtesting shows a profit and the other parameters returned are satisfactory (profit is the LEAST important parameter - much more important are drawdown, win % and number of trades) then proceed to walk-forwards testing. This can be done mechanically if you backtested on a fully historical past (eg backtested 2001-2004, leaving 2005-2007 for walk-forwards testing) or you can do this by paper trading. I personally prefer paper trading as it reveals things about a system that you would never have considered otherwise.
5. If your forwards testing shows performance within specification, proceed to trial trading. Trade the plan with a small amount of capital.
6. If this still performs within specification, then you probably have a robust system which can go into full production trading.
7. You may well need several iterations of this process for any given system.

This is an overview and an oversimplification, but if you at least do this, you'll be ahead of the vast bulk of traders out there.


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## tech/a (2 July 2008)

> I'm sure you'll never agree with this, but IMO trend following AND analysis based trading (Elliot, VSA, macro pattern recognition, et al) IS basically random and relies more-or-less totally on trade management to succeed.




No not at all.
I once believed as you do.



> The best trade managers are those that make the most money.




Plus I'll add---consistantly---and without blowing up.


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## MichaelD (2 July 2008)

tech/a said:


> I once believed as you do.



Not so at all.

Many traders have a psychological need for their analysis to make a difference. This inherently limits them to thinking within boxes.

There are very few outside of the boxes. I believe those that are are the ones capable of truly extraordinary returns, returns that are simply unimaginable to those constrained by their beliefs.


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## Wysiwyg (2 July 2008)

I would just like to tip this train of thought a bit.

Does anyone consider that the financial system you are dealing with `determines` the amount of success or failure?A trading method and the individual trader has to be accepted by the system for the trader to become financially successful.

First of all your friends have to be supportive of the ideas you have.They can affirm success with their words and help with observation and knowledge.

Secondly the brokers you are dealing with have to want you to be successful.They can push a stock in your favour or give you truths.Your success is the brokers success.

Thirdly the market you are in determines profit or loss from a trade!Not your method!The epitomy of vanity is when you `think` you are in control.We are all players in the game to serve someones purpose and to have our purposes met.


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## tech/a (2 July 2008)

Wysiwyg said:


> I would just like to tip this train of thought a bit.
> 
> Does anyone consider that the financial system you are dealing with `determines` the amount of success or failure?A trading method and the individual trader has to be accepted by the system for the trader to become financially successful.




I think you mean say the US financial state of affairs V ours for instance.
If so no.



> First of all your friends have to be supportive of the ideas you have.They can affirm success with their words and help with observation and knowledge.




No



> Secondly the brokers you are dealing with have to want you to be successful.They can push a stock in your favour or give you truths.Your success is the brokers success.




No--Brokers are not necessary when trading systems (Full service) pretty useless all round in my experiance.



> Thirdly the market you are in determines profit or loss from a trade!Not your method!The epitomy of vanity is when you `think` you are in control.We are all players in the game to serve someones purpose and to have our purposes met.




To a degree refer to my comments on Universe,can also be applicable to Futures and indexes where the role of "Market" may have a bearing.


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## Trembling Hand (2 July 2008)

Wysiwyg said:


> Does anyone consider that the financial system you are dealing with `determines` the amount of success or failure?A trading method and the individual trader has to be accepted by the system for the trader to become financially successful.



Accepted??


Wysiwyg said:


> First of all your friends have to be supportive of the ideas you have.They can affirm success with their words and help with observation and knowledge.



Why??


Wysiwyg said:


> Secondly the brokers you are dealing with have to want you to be successful.They can push a stock in your favour or give you truths.Your success is the brokers success.



 When does a broker push a stock for or against you??


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## MichaelD (2 July 2008)

Wysiwyg said:


> Does anyone consider that the financial system you are dealing with `determines` the amount of success or failure?A trading method and the individual trader has to be accepted by the system for the trader to become financially successful.



Nope. In fact, if anything the opposite is true. "Conventional wisdom" is usually wrong.



Wysiwyg said:


> First of all your friends have to be supportive of the ideas you have.They can affirm success with their words and help with observation and knowledge.



You'll be making money when they're hurting. No support there, just attempts at undermining what you're doing.

You very quickly stop talking about trading with your friends.



Wysiwyg said:


> Secondly the brokers you are dealing with have to want you to be successful.They can push a stock in your favour or give you truths.Your success is the brokers success.



Totally wrong. A broker succeeds by making you trade more so they earn more commissions. Plus, who will they look after - the big institution who has 1,000,000 of XYZ to sell or the small investor wanting to know where to put their money..."well, XYZ is a BARGAIN at the moment".



Wysiwyg said:


> Thirdly the market you are in determines profit or loss from a trade!Not your method!The epitomy of vanity is when you `think` you are in control.We are all players in the game to serve someones purpose and to have our purposes met.




This I do agree with. The market will produce whatever profit it produces and you have no control over that. Your only control is over the amount you allow the market to take away from you.


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## Wysiwyg (2 July 2008)

> Originally Posted by Wysiwyg
> First of all your friends have to be supportive of the ideas you have.They can affirm success with their words and help with observation and knowledge.




Why??

Humans have a greater success rate when in a group working toward the same goal.They can affirm success with their words and help with observation and knowledge.Sure, there are a few individuals who don`t need anyones support. 




> When does a broker push a stock for or against you??




When a brokers report or a buy/sell/hold recommendation is pushed toward financial institutions (retail funds, hedge funds etc.)Churning a stock, pump and dump.
Brokers do have weight.


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## AlterEgo (2 July 2008)

Wysiwyg said:


> Why??
> 
> Humans have a greater success rate when in a group working toward the same goal.They can affirm success with their words and help with observation and knowledge.Sure, there are a few individuals who don`t need anyones support.




I don’t agree. Friends (unintentionally) hinder your performance, not help. To succeed at trading, you need to be doing the opposite of what the majority is doing. Listening to all your friends “hot tips” and suggestions is a recipe for disaster (unless your friends are expert traders, with a similar trading method and timeframe to your own, which is very unlikely).


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## IFocus (2 July 2008)

Wysiwyg said:


> I would just like to tip this train of thought a bit.
> 
> Does anyone consider that the financial system you are dealing with `determines` the amount of success or failure?A trading method and the individual trader has to be accepted by the system for the trader to become financially successful.




No



> First of all your friends have to be supportive of the ideas you have.They can affirm success with their words and help with observation and knowledge.




No in fact they can bring their own bias which is most likely to conflict with your own causing you to suffer cognitive dissonance.



> Secondly the brokers you are dealing with have to want you to be successful.They can push a stock in your favour or give you truths.Your success is the brokers success.




No 



> Thirdly the market you are in determines profit or loss from a trade!Not your method!The epitomy of vanity is when you `think` you are in control.We are all players in the game to serve someones purpose and to have our purposes met.




IMHO market conditions determine profit levels but a reasonable trader should be profitable in all market conditions, being able to stand aside is a critical component of this.

When I am on my game its when I am aware of the type of market I am trading.

I am talking about discretionary trading


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## MichaelD (2 July 2008)

Wysiwyg said:


> Humans have a greater success rate when in a group working toward the same goal.



This might apply to other goals in life, but it positively does not apply to trading. As has already been pointed out, to succeed in trading you must normally do the exact opposite of what the crowd is doing. This is hard enough to do on your own, much less with the weight of a crowd bearing down upon you.



Wysiwyg said:


> When a brokers report or a buy/sell/hold recommendation is pushed toward financial institutions (retail funds, hedge funds etc.)Churning a stock, pump and dump.
> Brokers do have weight.



C'mon, surely you are not that naive? The big money controls the markets. You think they're going to take advice from their commissioned salesmen? Brokers are merely salesmen, often of very tatty second hand goods which the big money has given them to sell to the unsuspecting masses.


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## IFocus (2 July 2008)

MichaelD said:


> Brokers are merely salesmen, often of very tatty second hand goods which the big money has given them to sell to the unsuspecting masses.




LOL or blame those nasty short sellers............


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## IFocus (2 July 2008)

*Re: Trading discipline. Letting your winners run.*



> That said, is testing the be all and end all? I've seen plenty of traders who claim they use nothing more than their own intuition




Testing to me is the holy grail there is really so much behind testing that isnt appreciated. 
Sure you are trying to prove a method but its so much more
By testing you begin to train the mind what behavior is required to trade markets successfully.

Ask any mechanical trader how by back testing it open their eyes to how you really make money from markets, what works and what wont, by testing they start to understand what the parameters are when the system isn't working rather than waiting to lose a packet before coming to the same conclusion. 

The penny drops simply by working on the process not throwing money at the market and learning bad habits


Trading markets is like any other enterprise in as much its all about the processes, work on and understand the processors and the profits come as a consequence


Be skeptical of any claims made including any I make, there are some who can trade as you say but sorry its unlikely to be you  they are few and far between that can maintain the mental stability and discipline required. I only know one who is verifiable but she still uses all the key principles of trading and I suspect she has really only internalized everything else. 




> Reason I'm asking is that I'm still trying to 'find my style' and am open to investigating all options and strategies.




Stick to the basics to start with




> Obviously intuitive trading sounds attractive - less dry reading, more edge-of-your-seat decision-making, etc, but also a bit more prone to emotional involvement at the expense of rationality.




Ahhh that was my dream to took me two years to find reality then I had to go back and repair the damage


> I consider myself a fairly stable and rational person but I admit that I have made some bad decisions before, having held onto a stock for far longer than I should have.




Here is a clue you are just like everyone else..........follow Michaels testing advice and you will start to be different.





> I suppose I'm answering my own questions here. Different styles of trading for different people - all have the potential to work and the potential to fail miserably.




Your honesty with yourself will serve you well should you choose to keep going but unfortunately as you can see there is no certainty in markets not for anyone 

good luck hope this helps.


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## tech/a (3 July 2008)

> Testing to me is the holy grail there is really so much behind testing that isnt appreciated.
> Sure you are trying to prove a method but its so much more
> By testing you begin to train the mind what behavior is required to trade markets successfully.
> 
> ...




EXCELLENT.


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## nizar (3 July 2008)

*Re: Trading discipline. Letting your winners run.*



tech/a said:


> As for Systems trading and Developement 101
> Howard Bandy Quantitive Trading Systems is a good place to start although you'll need a mathamatical bent--- lots of time and patience.




Another I would highly recommend is Robert Pardo's
Design, Testing, and Optimisation of Trading Systems.


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## strudy (4 July 2008)

I follow a preset plan with my potential profit worked out prior to entry.
When that profit % is reached I am invariably out there and then.Greed has no say in my trading plan.
I am quite happy to let the next trader have his share of the profit.

If the stock is in a definite strong consistent uptrend,then I will then use a trailing stop loss to lock in the profits made.But they are few and far between of late.

Each stock is individual and treated as such.

Remember that it is only the activity in the market which will influence which way the share price will go.Either up or down.


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## SGB (4 July 2008)

strudy said:


> When that profit % is reached I am invariably out there and then.Greed has no say in my trading plan.
> I am quite happy to let the next trader have his share of the profit.




good work strudy,

You will never go broke taking a profit.... no matter how small it is.


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## MRC & Co (4 July 2008)

I'm still not convinced with profit targets.

Even though I currently trade high frequency, short-term (in which I believe they work the best), I personally, have missed out on quiet a few capitulations in my favour right after taking profit at a target.  I prefer now to simply tighten stops.

Not that I have the largest sample (only a few hundred).  

Just one opinion.


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## Neutral (4 July 2008)

This is the dilemma though. Set your stops too tight and you will invarialy get stopped out by the fluctuations in the SP. It may even go onto higher highs, or do the opposite. Either way you are out. I think it's all about finding that 'sweet spot' or a good stop loss % plan. But what would you do if the SP moved 3% upwards? Would you set up your trailing loss with a 1-2% tolerance of this latest movement, or would you leave it alone and hope the SP continues to climb as you only move your trailing stop in 5% increments?

On the other hand, profit targets will allow you to take from the market what you set out to achieve (if it goes up that is). It does have the limiting factor of what 'if' the SP did go on to new highs. Very unlikely in todays market.

Either way, you are profiting. But one method is more limiting than the other.


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## MichaelD (4 July 2008)

MRC & Co said:


> I'm still not convinced with profit targets.




Make that two opinions. I have yet to find a profit stop that improves expectancy. It can certainly improve win % though.


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## AlterEgo (4 July 2008)

I agree too. Profit targets will limit your overall return quite substantially, at least in my experience. Those occasional outlier trade returns that come up once in a while make a huge difference to your total returns at the end of the year. You'd miss out on them if you were using profit targets.


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## julius (4 July 2008)

MRC & Co said:


> I'm still not convinced with profit targets.
> 
> Even though I currently trade high frequency, short-term (in which I believe they work the best), I personally, have missed out on quiet a few capitulations in my favour right after taking profit at a target.  I prefer now to simply tighten stops.
> 
> ...




Of course you're going to miss out on the occasional big move if you use profit targets... just as you'll always end up giving back some open profits if you use a trailing stop.

It's absurd to draw blanket conclusions about profit targets because they don't suit a particular style of trading - the exit needs to suit the method and the personality of the trader.

Besides, the goal isn't always to maximise net profit. I could show you many, many systems that show much larger net profit without any stops...is it wise to trade systems with no stops ? Probably not...


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## MRC & Co (5 July 2008)

julius said:


> Of course you're going to miss out on the occasional big move if you use profit targets...
> 
> It's absurd to draw blanket conclusions about profit targets because they don't suit a particular style of trading - the exit needs to suit the method and the personality of the trader.
> 
> Besides, the goal isn't always to maximise net profit. I could show you many, many systems that show much larger net profit without any stops...is it wise to trade systems with no stops ? Probably not...




Of course.  But as Alter Ego says, those big runners make a HUGE difference.  You need those outliers IMHO to make great money.

Exits need to suit your personality, I agree.

Need to suit your method?  I also agree, however, is it not true profit targets are best for short-term trading?  Which I currently undertake.  And they still give me a worse net result.

My goal is always to maximise profits and minimise risk.  Finding the balance.  

Much larger net profit, as opposed to what base?  Without stops?  So when do you exit, at a profit target or never?  Many systems?


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## tech/a (5 July 2008)

MichaelD said:


> Make that two opinions. I have yet to find a profit stop that improves expectancy. It can certainly improve win % though.




And then in some trading methodologies this is the most appropriate exit.
In others such as trading new highs/lows in a market--Not so.

But as MRC says its a matter of balance.
Each has their own.
higher % win lower Expectancy
lower % win higher expectancy.


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## johnnyg (5 December 2008)

Trembling Hand said:


> If I had to be brutally honest I would guess that the real cause is from two things or a combination of the two.
> 
> 1. You have a small capital base that you NEED to work hard. Lets face it if you are swinging $500,000 you don't need much of a gain in your odd picks to make some good $$ as long as you have some sort of favourable R:R. Even a small expectancy you will be happyish with. But if you are swinging $50,000 every loss is a step closer to failure and every winner NEEDS to be a good one. On top of that every one that gets away is another lost opportunity and further reason to beat yourself up over. Not to mention the need to be "in" the market in case you do miss the next big one.
> 
> The answer is unfortunately have a huge capital base. If you don't have that then you MUST remove the $$ goals and shift your focus to expectancy. Which ironically is harder to do the smaller your capital .




Im having trouble letting my winners run. And I think that /\ sums it pretty much for me.


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## Wysiwyg (5 December 2008)

MRC & Co said:


> Of course.  But as Alter Ego says, those big runners make a HUGE difference.  You need those outliers IMHO to make great money.





Sooo, it can be observed that there are specific turning points when significant gains can be made.

These specific moments are very very very hard to wait for and subsequently the in-between trading brings me loss.

Like an internal battle with the ego saying go,go,go, now and the wisdom saying maybe tonight but if not I`ll wait until tomorrow night. 

Like a young man with a new love hoping that tonight will be the night and the older man knowing that the time will come, anticipating not.


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## kam75 (6 December 2008)

There's no best answers to your questions.  Trading is whatever YOU, yourself want it to be.  Don't like letting your profits run?  Then don't. But make sure you cut your losses to a fraction of what your profits are, consistently on every single trade that fails to progress as planned.  I have re-entry rules for stocks I've been stopped out from.  Some traders don't like buying the stock back at a higher price.  Nothing wrong with that approach. 

There are some common rules shared by all good trading methods -  

1. Sound money management!
2. Cutting losses fast!
3. Pyramiding winners and trading with the trend!  
4. Incorporate your own beliefs - and not somebody's elses!
5. They are repeatable to give you consistency!

A good trading method will account for every possible contingency and automate your decission making.
all the best


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