Session Management – Should We Use Daily Profit Targets or Not?

Email Question:

Hey Lance,

I have had argument after argument with people about whether it is the right thing to do, to have a daily/weekly profit target where you walk away.

I don't think it's correct to do, as long as you can maintain focus. I tend to subscribe to Mark Douglas's way of looking at it, like you're the casino, and you want to take every edge you can. But other's make a valid point that we are not a casino, and the analogy may be a bit flawed.

I want to know what your thoughts are, because I think so highly of your opinion. What do you think is technically correct?

I will say that most of my days do, in fact, end on a high watermark for the session, but I have no set target. I take what the market gives me, and also like to end the day on a nice winner.

Looking forward to hearing what you have to say,

Response:

There are questions in trading which have no simple answer.

For example:

"Which moving average setting will best define the trend throughout a sample of trade data?"

You can't know in advance. It might be the EMA(10). It might be the 15. It might be the 20.

Traders who optimise their indicator setting based upon that which gave the best result over a prior sample of historical data, will find that the setting they've chosen is unlikely to be the optimal setting over a future sample of data.

The best indicator parameter for a sample of market data, can only be known after the fact.

Second example:

"Which exit strategy will provide the greatest profit over a sample of trades?"

Sometimes the optimal result may come from taking early exits at the first sign of potential support/resistance. Other times the optimal result will come from letting them run for a higher timeframe target. Other times the optimal result will come form letting them run with a trailing stop (which type of trailing stop is another matter entirely).

The best exit technique for a trade, can only be known after the fact.

Your question:

"Which session management strategy will provide the greatest profit over a sample of sessions?"

As with the above questions, the best strategy can ONLY be known after the fact. I started with the above examples only because they're probably examples you're quite familiar with. The same concept applies to session management.

Sometimes you'll find that if you examine a month or more of data you may have been better halting each session at a certain profit level. Other times you may find that the month or so of data will show a better result had you continued to trade throughout the session.

So which is best?

There are two primary factors in the results you achieve – what the market actually offers (environmental factors in particular volatility and smoothness of flow) and performance factors (how well your decisions are aligned with the bias of the market).

Outperformance will only occur when both environmental factors and performance factors are suited to outsized profits. More often than not you will get less than what could potentially have been available. When you're trading well, but the environment is crap, you'll be annoyed with the outcome. When the market has a large trend day, but you're trading poorly, you'll be annoyed with yourself. When both are poor… we'll we're all familiar with those days!

You ask which is technically correct? I don't think it is a matter of mathematics. Because I believe the optimal result will change for each sample of data.

Instead, if you wish to be able to live with yourself, the plan needs to include consideration of the human aspects. Pick whichever feels right to you. And expect and accept some degree of underperformance when compared with what "could" have been available.

Do anything apart from this and it only leads to frustration.

This is not to say that we should not always be examining and testing alternatives to try to improve our edge. We should. But start with what feels best.

Of course, it's not always a "one or the other decision". There are numerous ways to blend the two. For example, a higher session target along with a trailing session stop. Or full-position size trading up to a session target, and then continuation only on half position sizes. Or… well I'm sure you can come up with others.

If you say that you have no set target and are more often than not ending on or near a high watermark for the session, then I think you've already answered your question. Do what feels right for you. Trade the full session. And expect and accept occasional periods of underperformance when the better result would have been to stop at a target value.

As always… this is just my opinion and it may well be wrong! 🙂

Cheers,

Lance Beggs


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