The following is some great reader Q&A regarding a quite difficult part of the trade management process:
I have been trading for a long long time and always have had one obstacle I can’t seem to overcome.
I feel I can pick the Perfect or Near Perfect Trade setups.
I feel I can allow it to confirm to “take” the trade.
I always have “Money Management” stops in place.
I feel I can raise my stop to breakeven when I’m ahead enough.
Now comes the problem. I don’t know WHEN to take the profit and run.
Over the years I have tried all sorts of guidelines.
- 50% retracement;
- 100% retracement;
- 50% out at 1st target with 50% at breakeven;
- Middle bollinger bands
- Middle Linear regression
- Opposite Bollinger Bands
- Opposite Linear regression
- gut feeling
- Money management: gain of 1x; 2x risk
- etc etc etc.
All of these are OK, IF I can pass the “in-between” area of uncertainty.
If I can get far enough ahead, I just follow up the stops to just below the previous pivot.
But it’s the “in-between” that haunts me.
Do I take the profit or put in a close breakeven stop.
If I choose either, sometimes the choice is great or terrible.
One time in the early 80’s, I put $750US into #2WSugar and in three weeks it was at $28,000US.
Didn’t know what to do.
Finally got out with $18,000US, which was great but it killed me to lose that $10,000 extra profit.
OK, this is an exception, I was stupid, I should have taken the money and run.
But even on the smallest trade I still have the same problem.
When to take the profit!
So after 45 years trading I’m still open to ideas and opinions.
Even now, I try to “listen” to many opinions about trading; some I reject immediately, some I ponder, some like yours I most appreciate.
I especially liked your thought conveyance that there is no Holy Grail, it takes hard work and experience to trade.
You make sense and deal in the “real world”; many many others don’t, they have gimmicks that work only for a moment then fail.
I have seen it over and over again. Your approach is most refreshing and “real”. Thanks!
So my long winded question is: When and How do you trade in the area “in-between” ? (In-between Profit and the breakeven point!)
In Street Smarts, Larry Conners stated, “No matter how long you trade, you’ll never do it perfectly. Case in point. A friend of mine is a retired market wizard. This man has made over $100 million trading futures. He told me that his biggest market weakness was that he never mastered his exit strategy!”
And that’s exactly what we’re talking about here.
The exit strategy is really the trade management strategy. Do you tighten up that stop, or take profits, or hold a wider stop to give it room to breath?
Our analysis gives us a bias for market direction. Our trading plan gives us general rules for trade management. But beyond that, when in a live trade, all we can do is manage it as best we can with the primary goal of managing risk, but secondary goal of running trades.
The in-between area that you talk about is difficult. The only way I can psychologically manage this area, is through multiple part positions, so that the first part satisfies my need to take partial profits, and the second part is available to run if I deem the market to offer that potential.
Generally, I will trade a bit more tightly in the beginning of a session, or when daily P&L is around breakeven or in a drawdown, leaning more towards taking profits early on part two. Only when up for the session will I be more willing to let part two run, risking a breakeven stop.
But even then it’s still all unknown territory.
All we can do is manage it as best we can, accepting imperfection, and then reviewing post-session to see if there was anything we could have done better.
Operate in accordance with some general principles. Never allow losses to exceed the maximum planned loss. Take windfall profits when they occur. And then you’ll often find that trading may involve grinding periods of small profits and small losses, broken occasionally by the outlier profit.
I hope that helps a little. I know you don’t expect me to offer some holy grail trade management solution (“take profits at 1/pi x initial risk”). I wish I could. But unfortunately, as a discretionary trader, I think the only solution is to learn to accept imperfection. And learn to forgive ourselves, over and over and over again.