Over in the FX Flow forum we’ve been talking exit strategies…
Rob posted up his musings on trading with ‘hard’ Profit Targets V’s Simply Exiting with a trailing stop.
Here’s what was on his mind:
“I’m thinking of Bitcoin in December. If you’d set a “normal” take profit level, you’d have missed out on a majority of the run – if you’d trailed, you could have had all of it.”
Now, just to give you a bit of background…
With the FX Flow strategy, one of the pre-cursors to trading is that we establish enough potential profit to justify the trade.
We don’t trade just for the hell of it, or to feel ‘busy’.
Remember when supermodel Linda Evangelista said ‘we don’t wake up for less than $10,000 a day?’ Well, it’s a bit like that (only without the high glamour, and not as many zeros!)
So as part of our pre-trade preparations we always scope-out special price levels on the chart to use as profit targets.
The market may, or may not, halt at these levels. We don’t know for sure what will happen, nobody does. But we do know the market is likely to react to these price levels to some degree when it reaches them.
It could be a short-term pause in the trend. Or even a full blown reversal. And that means a probable peak in our profits, at least for the meantime.
So… what to do for the best?
Well, using trailing stops that can eventually allow trades room to develop into HUGE trades is definitely something to be encouraged.
But on the other hand, you don’t want to watch too much of your paper profits disappear in a puff of smoke. Especially since you should already know in advance the price levels at which the market is likely to stall or turn.
So finding the optimal approach to take can be a bit of a mind-bending paradox. And the simple answer is there isn’t a universal ‘best way’.
Some trades would have benefited most from using the hard target, some by using the trailing stop. And it only becomes obvious what would have worked best with the benefit of hindsight!
But… here are 3 ideas that will give you some flexibility. Use them on a trade-by-trade basis, according to your analysis of the individual situation:
1) You could exit part of the trade at a hard target and then let the rest run-on with a trailing stop
2) You could bring the trailing stop in real tight (so you don’t give-up too much if the market reverses, but you do still give the trade chance to develop further)
3) You might exit the entire position and then look to buy back in at a better price once you’ve seen a reversal on the chart.
And one other thing that is worth mentioning…
Moves like the huge ‘bubble run’ in Bitcoin are the exception rather than the rule.
Remember they are market anomalies that come along once in a while.
It’s a better proposition to base your performance benchmarks on the kind of price action you see week-in, week-out on your charts. That way you know you’ll be getting immediate and incremental benefits from your optimised exit tactics.
I can’t share details of how we find the FX Flow Trader profit targets here, but have a think how you might adapt these ideas to your own trades.
Until next time…