T2W Trading Community

7. Profit Taking Exits.

At the moment our only profit taking exit rule is to close at the end of the day, quite simply because we are developing a day trading system with no overnight risk. Generally on a strongly trending day (the type we are aiming to capture) the market will close at very near the high/low for the day so closing the trade at the market close makes sense.

However, there are days where the market will break one way or the other and then stage a reversal before the close. If we are waiting until the end of the day to close we may find that our trade moves substantially into profit before reversing and giving that profit up.

The most common profit taking exits are:

• A trailing stop
• A target

Let’s examine both of these concepts in regards to our Dow system, starting with a trailing stop. Rather than leave our stop at the opposite extreme of the opening range we’ll trail it behind the market – if we are 10 points in profit then our stop will move 10 points. Of course, the trailing stop can only move in our favour, we should never move it further away.

Trailing the stop behind the market produces a net profit of 5.55 points per trade, compared to 6.50 when we did not trail it. On this particular system, trailing the stop seems to be inferior to leaving the stop alone.

How about setting a target? In order to future proof our system we should ensure that the target is a function of current market volatility. Therefore we’ll use a percentage of the opening range as a target.

Target as a %age of opening range	%age where target hit	Average profit where target hit	%age where target not hit	Average profit on trades where target not hit	Expectancy per trade
10%	88%	6.47	12%	(19.00)	3.43
25%	72%	15.26	28%	(20.29)	5.15
50%	45%	28.29	55%	(17.57)	3.05
100%	21%	51.30	79%	(8.03)	4.49
150%	9%	73.00	91%	(3.11)	3.87
200%	6%	91.67	94%	0.50	5.52
250%	3%	116.00	97%	2.61	5.73
300%	1%	108.00	99%	5.09	6.03
No target	0		100%	6.42	6.42

By setting a target we aim to increase the winning percentage, the trade-off is that we reduce the average winning profit. We can see that setting a tight target at just 10% of the opening range gives us 88% of trades where the target is hit. Which psychologically is great, we’re winning almost 9 times out of every 10 trades. Unfortunately, our average win is just 6.47 points against an average loss of 19.00 points on the 12% of trades that do not hit the target.

Setting a target has reduced the performance of our system, we will continue to hold trades until the close.