Letting profits run versus selling at target price

[robusta]

Funny you brought this up Julia this has been in my thoughts for a while now.

Might, however, be interesting to have a thread on letting profits run versus price reaching IV.

Having never used stop losses lately I have been considering the possibility of using a trailing stop to sell when one of my more liquid holdings reaches my calculation of fair to over valued. To date this has not been a issue as most sales have been when I have found something better or for portfolio management reasons.

The trouble with the trailing stop is how will it behave in extreme volatility? It would be nice as advertised if you could take profits at say 5% or 4.5% below the most recent high but how does this work with a risk on, risk off market like we have had recently?

 

[CanOz]

Funny you brought this up Julia this has been in my thoughts for a while now.



Having never used stop losses lately I have been considering the possibility of using a trailing stop to sell when one of my more liquid holdings reaches my calculation of fair to over valued. To date this has not been a issue as most sales have been when I have found something better or for portfolio management reasons.

The trouble with the trailing stop is how will it behave in extreme volatility? It would be nice as advertised if you could take profits at say 5% or 4.5% below the most recent high but how does this work with a risk on, risk off market like we have had recently?

It's a bit of "roll the dice and take your chances" Robusta...trailing stops generally hurt performance of a system because while they protect profits, they take you out too early.

Maybe tech/a can recall some rules of thumb regarding trailing stops....lots available on them on the web.

CanOz

 

[tech/a]

Rule of thumb from my results in testing.

Trading methods with win rates above 50% perform better with price targets
Infact it's one of the reasons you have a higher win rate.

Methods with a lower win rate can benefit from trailing stops.

Having said that

Most longer term methods with lower win rates but higher
R/R perform better with a trend filter which either stops buying in
Index reversals or completely stopping trading the method.

Some systems will sell All holdings in extreme downturns with it's exit
Criteria. Something that happened with " Tech Trader " in 2008 something I didn't expect!
I had already sold all my holdings but as it turned out I'd have been sold out by the system.

Robusta

From what I've seen I don't know that your method has ever been tested either back or forward tested.
What I see is a loose discretionary method which basically wings it.
Mind you not un common most people trade like this.

But without statistics and testing methods questions like yours---which can be very influential on profit
Cannot be answered in a specific case.
It just becomes another discretionary filter with no rules and no guide to how it's introduction is likely to affect your bottom line.

 

[Gringotts Bank]

It's a bit of "roll the dice and take your chances" Robusta...trailing stops generally hurt performance of a system because while they protect profits, they take you out too early.

Maybe tech/a can recall some rules of thumb regarding trailing stops....lots available on them on the web.

CanOz

I'll second this. Whether you use a mean reversion or momentum system, percentage and point trailing stops are a thing to avoid, even when adjusted for volatility. It's not something you'd expect when eyeballing a chart, but they really hurt profits. However I have found S-R trailing stops to be ok with momentum systems. With a S-R trail, each new low pivot provides the stop. If you use this, make sure the n-bar is low so you're getting lots of new pivots printing, otherwise you can end up with a stop that is too far away. Maybe combine with a time stop.

Plenty of ATR-style trailing stops avail free on the web.

 

[DocK]

I often hear one of the panellists on YMYC advise a caller to take profits off the table when a share has run hard, or reached a price target set by analysts. I can't really understand why you wouldn't either set a stop instead and let it run further if that's what it's going to do, or simply watch it very carefully and wait until the trend reverses to sell. Seems pointless to me to sell a rising share just because it's hit an arbitrary price point that may or may not represent full value - we all know that the market can be totally irrational at times so why not profit from it if you can? Over recent weeks I've heard quite a few "experts" declare that the banks had no further growth left in them and they'd cash out of them before their share prices fall - I'm certainly glad I didn't follow this advice as my CBA shares have continued to appreciate in value.

It's true that you won't go broke by taking a profit - but you won't get rich by cutting your profits short either. I've also learnt that having a stop in the market opens you up to the daily volatility hijinks and often takes you out of a trade that recoveres in the same day and continues to power on. I do believe in stops - but I prefer to follow eod price and enter a sell order manually. Having said all that - I'm looking for a medium to long-term holding and my approach would make no sense to a short-term trader I expect.

 

[Gringotts Bank]

example of pivot trail stop. So long as each new low pivot (green) is higher than the last, you're in an uptrend. Note the big hammer candle that forms the last pivot. If you had your stop to trigger at a percentage trailing stop intra-day, you may well have been manipulated out of a good trade. So as dock just said, if you use trailing stops, make them applicable to EOD prices.

 

[CanOz]

It's true that you won't go broke by taking a profit - but you won't get rich by cutting your profits short either. I've also learnt that having a stop in the market opens you up to the daily volatility hijinks and often takes you out of a trade that recoveres in the same day and continues to power on. I do believe in stops - but I prefer to follow eod price and enter a sell order manually. Having said all that - I'm looking for a medium to long-term holding and my approach would make no sense to a short-term trader I expect.

I agree hat you're better off not taking profits and leaving yourself open to a multiple R outlier....some say that if you MUST take profit then just take profit on a partial position...that way you bank some but leave some on for that elusive multi bagger. Not my cup of tea though.

Food for thought...

Good thread Robusta...hope it dosn't turn into a FA/TA bash-up again.

CanOz

 

[CanOz]

So as dock just said, if you use trailing stops, make them applicable to EOD prices.

Agree, if you are a longer term trader and not an intra-day trader then ignoring the intra-day swings is a good idea and using EOD stops on pivots is one way to protect profits....


CanOz

 

[tech/a]

I often hear one of the panellists on YMYC advise a caller to take profits off the table when a share has run hard, or reached a price target set by analysts. I can't really understand why you wouldn't either set a stop instead and let it run further if that's what it's going to do, or simply watch it very carefully and wait until the trend reverses to sell. Seems pointless to me to sell a rising share just because it's hit an arbitrary price point that may or may not represent full value - we all know that the market can be totally irrational at times so why not profit from it if you can? Over recent weeks I've heard quite a few "experts" declare that the banks had no further growth left in them and they'd cash out of them before their share prices fall - I'm certainly glad I didn't follow this advice as my CBA shares have continued to appreciate in value.

I think youll find its as canOz says for those rises well in excess of the norm.
Ive found that if a stock rises more than 50% in a day and more than 70% in 2 days
your best advised to place a trailing stop.
These sort of moves are common in the minnows.

It's true that you won't go broke by taking a profit - but you won't get rich by cutting your profits short either. I've also learnt that having a stop in the market opens you up to the daily volatility hijinks and often takes you out of a trade that recoveres in the same day and continues to power on. I do believe in stops - but I prefer to follow eod price and enter a sell order manually. Having said all that - I'm looking for a medium to long-term holding and my approach would make no sense to a short-term trader I expect.

Actually the assumption is wrong and many have indeed failed miserably taking profit.
EG
10 trades 7 wins of 5% and 2 losses of 25% each plus one breakeven. Of course there are infinite variations of the same premise.

Best---in my opinion trade short and sweet when things are not predictable and long and hard when they are---short OR Long.

Timing IS everything

If one doest have the skill to be around the mark at tops and bottoms (Shares,Property/Gold/Currencies/Oil/Indexes--etal) you need to have something in the market (of choice) at all times. Here Risk mitigation techniques should reside.

Good thread Robusta...hope it dosn't turn into a FA/TA bash-up again

Frankly CanOz I've not seen a great deal of statistical info produced by the F/A group here (on ASF in discussion).
What is discussed are theories and hypothesis.
Once numbers (the very thing F/A people ponder over for days) are asked for support or in addition to discussion ---it then seems to become a T/A V F/A bash????????????????????

I think BOTH technical and Fundamental traders can and often do present cases without some Idiot labelling discussion a competition on which trading method is BEST!

This labelling normally comes from those who cannot follow the discussion or have nothing concrete to add.
They often see failings in their trading and dont have the capability of fixing it--or even attempting to.

 

[prawn_86]

Frankly CanOx I've not seen a great deal of statistical info produced by the F/A group here (on ASF in discussion).
What is discussed are theories and hypothesis.
Once numbers (the very thing F/A people ponder over for days) are asked for support or in addition to discussion ---it then seems to become a T/A V F/A bash????????????????????

SKC, McLovin, ROE, SirOsis all offer up numbers at various stages and across various different FA strategies

 

[tech/a]

SKC, McLovin, ROE, SirOsis all offer up numbers at various stages and across various different FA strategies

As I said very few.
I didn't say NOBODY

Infact I'd argue that very few traders Of any ilk
Know the " Numbers " of their trading method.

This in my view is the most FUNDAMENTAL undertaking all traders
Should have at their disposal.

If your a Technical trader you need fundamental numbers either from past
Historical testing and or out of sample and or real time results.

The vast majority of Technical traders think the be all and end all is entry.
Second is exit ----- pondering chart after chart line and indicator color the page

It's only when they don't make CONSISTENT profit they either leave the field as
Everyone was right---it is voodo
OR
They invest the 10000 hrs in learning " How to Trade"

I can certainly say the same for those Fundamental traders and the THIRD type who simply gamble.

 

[DocK]

I've always considered that selling at a set profit point would be something that a fundamental analyst would do when price reached or exceeded their calculated full value of a stock, but also something that a technical analyst may do based on prior resistance levels, or fibonacci extentions for example. I don't see that practice as belonging in one "camp" or another, but equally used by both. I can see the reasons for letting price run from a technical and systems-based perspective, and would be interested to hear what method funamentalists prefer. I too would dearly love to be able to have a reasoned discussion, rather than the slanging match that often ensues......

 

[CanOz]

Thats an interesting question Dock...maybe So Cynical can comment? I think there would be a great difference in what a value type investor does and a fundamental 'trader'...

Even Warren Buffet must sell some things once in while..., not just losing trades, but issues that get overvalued?

CanOz

 

[skc]

Re: selling on fundamentals.

I make plenty of mistakes selling too early... usually I calculate a "value" using fairly conservative assumptions (e.g. higher discount rates, lower growth etc). I buy a stock when there's a safety margin below that conservative valuation, and sell when it reaches the target.

While a conservative value for entry will serve you well, this kind of exits will leave much on the table when the company is performing well and hitting revenue / profit targets.

So the investor should adjust the valuation to a somewhat optimistic figure, and sell if the share price exceeds that by a certain % (or adopt a trailing stop of some description).

 

[So_Cynical]

My strategy is a bit of both worlds and it has proven to work quite well as a conservative (risk off) tool.

I sell around 2 thirds of a position when there is 10 > 15% profit to take...leaving the rest as about 40% free carry and 60% capital, selling 2 thirds takes money and risk off the table and allows me to recycle capital, while the small holding i have left exposes me to bigger moves (in both directions) and a dividend/credits stream.

Experience and my open profits from reduced positions clearly shows that big moves come and go, the market moves both ways though overall mostly up, letting some of your profits run has been very beneficial to me and the dividend stream just keep building as long as i keep recycling the cash...at a time like now when the market is having a big leg up my strategy shines.

-----

In my experience i have proven to myself that i have some talent for seeing bottoms and value, and i have next to no talent at seeing tops..over the years almost everything i have sold has gone higher in the 4 months after i have sold...its one of the most consistent outcomes of my strategy, as someone else on this forum says "i made money selling to early"

 

[burglar]

...I can certainly say the same for those Fundamental traders and the THIRD type who simply gamble.

When I arrived here, I thought I was an investor (slightly down on his luck vis a vis the GFC)!
I have since come to the sad realisation that I had been simply gambling.

 

[McLovin]

In my experience i have proven to myself that i have some talent for seeing bottoms and value, and i have next to no talent at seeing tops..over the years almost everything i have sold has gone higher in the 4 months after i have sold...its one of the most consistent outcomes of my strategy, as someone else on this forum says "i made money selling to early"

I don't think you're alone in that regard.

 

[So_Cynical]

I don't think you're alone in that regard.

Even when i have sold out completely thinking well this cant go higher, and then it promptly does just that.

Stocks can swing wildly in both directions, any system or strategy that lets the profits run can at-least take advantage of the inevitable run ups in price....its just that its so dam hard to do that with a (risk off) stop in place.

Just take the 2 words...Stop & Run - they are opposites of a kind, Stop is no movement and the end of something and Run is rapid movement and something in motion...they don't sit well together.

 

[explod]

In my experience i have proven to myself that i have some talent for seeing bottoms and value, and i have next to no talent at seeing tops..over the years almost everything i have sold has gone higher in the 4 months after i have sold...its one of the most consistent outcomes of my strategy, as someone else on this forum says "i made money selling to early"

Some years ago I purchased a book "Trend Following" by Michael Covel and have found it very good. A later one "Little Book of Trading, Trend following strategies for big winners" I have, but not looked it over yet, said to be very good as well. Basically, get on on a 10% rise and off at a 5% fall, one in six trades work and those that do cover the loss of the other five.

Yes the big issue is, do I let it run or not. The 5% stop idea does cut one off prematurely but safe..

On a trend I tend to rule up the top and bottom of a trading range from the start of the trend and set my stop at the bottom. However it is the trading activity, volume most telling for me. High volume on a stalling top is a sell, high (more correctly increasing) volume near the stop is a hold.

The opposite is true of low volume, low at top hold, low volume and falling get out fast as liquidity comes into the equation on this scenario here.

 

[tech/a]

Good stuff ex.

You have one of my entry and exit criteria for long and
Short trades.
Another is the complete opposite to your low volume
Observation.
I look for an EXTREMELY low volume bar FOLLOWING
the bar with very high volume ---- in the same direction as the
Very high volume bar ( max 10 bars following the very high volume
Bar 3 to 6 bars ideal )
My stop is a the high or low of the extremely low volume bar.

PAV has been using it for sometime with success I believe.
Finds quite a lot of starts ----- finishes and continuations.

Many also forget t place their stop at Break even as it moves well
In their direction --- this can have a great affect on the bottom line.

Click to expand



The 6 th bar (second gap) could also be argued as the buy trigger bar.