Run your profits - how ?

Glenn

Experienced member
1,040 118
When I started out in this business years ago, I read a few things.
Most experienced traders seemed to say the same thing - Run Profits, Cut losses.
Fair enough. Good advice.
But that's as far as it went. No explanation.
As time went by I could see that I had got out of positions too early and that I could have earned more by staying in longer. But how long to stay in ? Minutes, hours, days, weeks ? etc
The main variable for this seemed to be ones own tolerance to being in the market - i.e. timeframe, plus the ability to allow retracements and consolidations on the way to better prices. The usual greed and fear thing.
Everyone will take a different view on this. Some will try to trade the retracements, some will sit for the longer ride. Some will just exit at some point and wait for their next 'signal' to enter, depending on what they use.

What I have learned is the the one thing I must concentrate on (and which many people who post around the net don't seem to) is having a target price in mind. I have spent years developing and refining various methods of calculating (maths) targets based on chart formations. Others are commonly known and well publicised. If I can't calculate a target then I don't take a position.

Once you have a target and enter, then in theory you will either hit it or get stopped out. The success rate depends on your skill in calculating targets and managing the position along the way. This can only come from practice.
When you arrive at/near a target, you can review the position as if it was a new trade and decide whether there is another target to go for. If so, you can set another stop and manage the position again. By doing this you can stay in the position for several targets in a row.
This is what I interpret as the meaning of running a profit. It's a series of managed steps within a position.
If at any time you can't calculate another target, then exit.
If you can see a target in the opposite direction to your trade, and that target eats away a lot of your profit, and the chart signals that it is moving that way, then you can decide whether to exit and wait for another entry.

What is missing from this is a diatribe on the various methods of calculating targets. I don't propose to go into that in detail because I could write a book on it. Frankly I don't have the time, which is also why I don't post much.
But what I would say to any newbie is that imho targets are very important and if you can't identify them before you enter, then you shouldn't enter.
You need to have a reward/risk ratio of at least 2:1 in your favour before you take a position.
As a simple example, without taking account of dealing costs, if your target is 20 points away from your entry and your stop is 10 points away, then you have a 2:1 ratio of reward to risk. Anything better than 2:1 is good - anything less is not recommended because there is not enough potential reward to justify the risk you are taking. If you don't have a target, then you can't calculate the ratio.
In my experience, if you are hoping to hold for longer periods, then you also need to look beyond the individual chart for your chosen instrument, and look at the state of the main markets.
If they are consolidating, then you can expect smaller moves up and down while things get sorted out. If they are trending, then you can expect bigger moves. The main markets are like a tide flowing, and they tend to take most things with them, even on an intraday basis.

One other thing. I only use naked ohlc bar charts and price quotes. No indicators at all. For me they take my eye off the ball and only serve to confirm what has already happened in the bars.
They tell me nothing about the future. They went in the bin years ago. If there's holy grail, for me it was the bin.
When I'm driving I prefer to look through the windscreen, not the rear-view mirror....and I don't get in the car in the first place if I don't know where I'm going.

I'm sure other traders will have other methods of running a profit which work. There is no one solution. Just thought that the above might be of interest. Certainly I wish I'd known it years ago
:)
Glenn
 

sidinuk

Established member
624 5
I think you also need to consider the probabilities of your stop or target being hit. It's all very well having a 2:1 reward:risk ratio but if your stop is getting hit 75% of the time then your still going to lose money.

Calculating the reward:risk ratio is the easy bit, how do you calculate the probabilities of it actually happening though? Any answers to that would be gratefully received!
 

bonsai

Veteren member
4,106 10
sid
I suspect the probabilities bit is a figure of speech only.
but having more than one reason to take a trade may be a good start.
after all, if you try to catch a falling knife, the "probability" is
you will regret it ?
 

Glenn

Experienced member
1,040 118
Sid
I think that if you spend time on targets, you will develop the confidence to use them, irrespective of exact probabilities.
As I said before, watch the overall markets for direction or consolidation. They support your decision.
Bonsai is saying the same thing in a different way.
Go with the flow, not against it. The best trades are also the easiest.

I don't advocate targets as the only thing to learn. What I am saying is that I believe that they are important and that few people seem to spend time on them.
It seems odd to me that the very thing one ought to have a handle on before taking a position i.e. "where's it likely to end up" is ignored.
That seems like a recipe for disaster to me.

Reminds me of the Mars/Venus story of how a man explains himself when he gets lost on a journey because he doesn't like to admit he's wrong.
"It's ok, I'm looking for an alternative destination" :)

As regards the 2:1 ratio, I recommend improving it by always waiting for pullbacks before entry. That way your losses are smaller and your profits are bigger.
If there's no pullback don't enter. Always another bus coming, so no need to chase up the road after the one you just missed .

Glenn
 

DaveJB

Experienced member
1,159 42
Glenn's point is a good start I think,
(deja vu here Glenn, I believe we've met elsewhere <g>?) Targets help you focus, in fact having to set a realistic target based on some formula or TA rule (such as the upper channel above an MA) helps make sure you are going into a trade with some genuine TA assessment behind you rather than some airy fairy approach that the chart 'looks right' or simialr rubbish.
Personally I've recently read Alex Elder's 'Come Into my Trading Room' and rate it highly - not so much for his inventions (I tend to laugh as he says that 'no doubt' TA software will include his creations in due course, modest devil that he is) but he gives details for an example of how to swing trade, how to trade a trend, and so on. Now I haven't gone back and checked any of these yet, and his example charts are the sort that have signals on a blind man could see, but at the end of the day they give a darn good intro to the sort of thing you need to consider as you develop your own TA and trading.
Just my 2p!
Dave
 

Glenn

Experienced member
1,040 118
"(deja vu here Glenn, I believe we've met elsewhere ?) "

Hi Dave
That's right. :)
Glenn
 

bonsai

Veteren member
4,106 10
I hear a lot about the need to have targets but I had better
first confess that I am not a believer.

By setting a target, I suspect you are creating some
mental baggage which it may be hard to shake off when
you need to.

Every (any) pull back can turn into a downtrend.

I think you need to devise a way of determining whether the reason you entered the trade is still valid or not. And if not,
forget your ?target? and get out !

Riding a trend is very much like riding a bucking bronco.
Most trends try to shake you out. The only way to overcome
those situations is to remain objective.
So devise your rules for the trade before you enter the trade.

Simple rules tend to work best.
e.g - Always take 50% of best profit ?

You are not there to win prizes, you're there to take money from the market !

There is always a No 8 bus coming just behind
 

DaveJB

Experienced member
1,159 42
Bonsai,
I'm confused a bit - what is 50% of best profit?
Other than that all Glenn is saying is that you estimate, using the best tools at hand, what the likely return will be and compare it to where you would place your stop. If there's obvious resistance 10% overhead then you might say 'okay, for 2:1 my stop must be 5% under the price then' and if the TA tells you to place the stop further away than 5% you don't trade - it's a tenet of faith with many traders that you don't enter a trade until you have the exit decided, and using a target as the exit signal is not uncommon. Some targets are perhaps better than others, and many traders will reassess targets on a daily basis, but they do help ensure you don't take a position on a nice looking chart where the pattern works out beautifully and you make 1%.
Dave
 

bonsai

Veteren member
4,106 10
Dave

all good stuff but I was trying to address the movement
between entry and target. On the way there, at some point, the market is going to try and shake you out.

It doesnt matter a damn where you thought the target might have been, the market's going to go where the money takes it.

So at what point do you abandon your concept of 'target' ?

If you set a target, there is a danger that every up move will reinforce your view and every down move will be ignored.


And I am not a believer in setting stops in the way you have outlined either.
 

barjon

Legendary member
10,602 1,741
Hi all,

Think you must have a target to start with but from there I'm mostly with Bonsai.

When the market falters on its way to your target it raises the question "if I was entering now would I buy or sell" . If the answer is against the direction of your position, then close it. If there is no clear answer then hang on but keep asking the question!

Good trading.

Jon
 

Glenn

Experienced member
1,040 118
"If the answer is against the direction of your position, then close it."

That's what I said at the start of the thread:)

"If you can see a target in the opposite direction to your trade, and that target eats away a lot of your profit, and the chart signals that it is moving that way, then you can decide whether to exit and wait for another entry."

Glenn
 

Glenn

Experienced member
1,040 118
Hi Jon
Separate topic.
I sent you a private message several days ago about Supply and Demand.
Did you read it yet ?
Glenn
 
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