Bugging out of the trade before the SL?

[Blogsy]

Heya all,

So the trading plan continues to evolve with testing, paper trading and the endless reading... and the odd question keeps popping up. Just as I thought I was happy with sitting on an initial stop to pre-define any loss, I've recently noted in two different places (Nick Radge's "Adaptive Analysis" and Art Simpson's "Phantom of the Pits") comments about making the trade prove itself to you, rather than just waiting for the market to prove your position right or wrong. If it doesn't move the way you've positioned your trade to profit from (or doesn't move much at all), then cut it sooner rather than later - even if it hasn't hit your stop.

Do many people "pro-actively" manage their trades in this fashion - using the stop as a "last resort" but actually exiting a position if it fails to perform as anticipated? Are there any ins or outs that aren't obviously apparent to this?

Thanks as always,
Dean

 

[tech/a]

Absolutely Dean.

Personally I look for immediate movement in my trades.
I move to B/E as soon as possible (Currently day trading 1 to 5 min charts).
I would rather have a few more trades on a chart in a day than risk a 1R stop if its clear that's going to happen.
Personally I only open up the reigns when in profit with stop just above B/E to cover brokerage.

 

[Chorlton]

Heya all,

So the trading plan continues to evolve with testing, paper trading and the endless reading... and the odd question keeps popping up. Just as I thought I was happy with sitting on an initial stop to pre-define any loss, I've recently noted in two different places (Nick Radge's "Adaptive Analysis" and Art Simpson's "Phantom of the Pits") comments about making the trade prove itself to you, rather than just waiting for the market to prove your position right or wrong. If it doesn't move the way you've positioned your trade to profit from (or doesn't move much at all), then cut it sooner rather than later - even if it hasn't hit your stop.

Do many people "pro-actively" manage their trades in this fashion - using the stop as a "last resort" but actually exiting a position if it fails to perform as anticipated? Are there any ins or outs that aren't obviously apparent to this?

Thanks as always,
Dean

IMO It depends.....

If ones system generates a larger number of signals that can be taken due to ones capital allowance, then getting out of a trade early if it doesn't immediately move in ones favour can be very useful, as it ensures that ones money is not unnecessary tied-up.

However, if ones system does not generate excessive signals, then I would be probably more willing to allow the trade time to either move into profit or activate my SL.

Either way, I would backtest this approach in advance to see whether there really was an improvement in doing this. Although in theory it sounds like a logical approach, this may not be the case when it comes to your end results...

Chorlton

 

[kam75]

Depends on what your rules you had for that trade. If I exit before my stop is hit, I would have planned it that way from the beginning, before I entered the trade.

 

[peter2]

Blogsy: If you know the expectancy of your system using the original SLs, then you would be able to compare your current expectancy using your "pro-active" management to see if it is better. If your expectancy has improved then you should continue to be pro-active.
If the expectancy is lower you know what to do.
There are no "ins or outs", your trading performance will tell you which mgt style is better.

 

[Blogsy]

Thanks guys,

You're right, testing is the best way of assessing this kind of trade management (especially if I lean towards a discretionary rather than mechanical style, which I've always had the tendency to do). Logically though it does sound the way to go as it seems to follow the "protect your capital" rule that is paramount to trading.

Thanks again for your answers and suggestions,
Dean