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Do you enter the market with stops and profit target orders and go do something else - or take a more flexible approach; pull a stop in here, let a target out a bit there....
If you had to vote for one or the other what would be it be and why?
I'll go first.
Set and forget (unless I reverse) because:
- I think I am better at spotting levels than reading price action
- If I have an opportunity to fiddle with a trade I invariably will, not always with a good outcome
- I can get away from the screen and live a little more
- Forces me to be more selective and prevents over-trading
And all responses gratefully received.
know thyself
Can you help answer these questions from other members on NexusFi?
The most dangerous for me is moving stop to BE which was my MO for a long time.
Now, regarding stops I have a checklist outlining exactly when I can move a stop and why. For example, if an opposite signal fires have the option to move my stop or exit the position or shrink up the target.
For targets, I have the option to expand them based on landmarks that exist on the chart to justify the move.
These tweaks to my trade "management" helps counteract the effect of an heightened state that occurs after the trade is entered into.
I learned from a trading psychologist that decision making should be made prior to getting into a trade because that decision making ability will change dramatically during a trade.
Therefore, the rules for exiting are defined beforehand.
I will vote for active trade management. (I am on my mobile so I will try to give an explanation but will elaborate further if required later.)
I am a firm believer that your "edge" in the market does not simply comprise of your entry location to a set target. Rather , I believe that your edge (or positive expectancy) is a summation of all of your actions in the market. This means that as long as you interact with the market, it will either affect your edge positively or negatively. Bear in mind I come from the perspective of a short term trader (10 m trades on average) but I believe as markets are fractal, it should apply to longer term traders too.
The reason why this is so is because every action you take in the market is bound to affect your bottom line. It is the nature of a very one dimensional game. Some actions may affect more than others (removing your stop vs simply exiting a profitable trade early) but you get the idea that every interaction with the markets will lead to a different end result. The key is to maximise that end result - resulting in the highest expectancy in the long run, the holy grail of trading.
While there are advocates of set and forget, the premise for the arguments are due to the fact that the human mind is weak and will make many mistakes (psychologically grounded), thus set and forget may lead to the higher expectancy for that individual trader. However, for me, to be the best in the game, to say that set and forget is best is equivalent to avoiding correcting and perfecting the psychology needed to truly excel in the game. It is akin to avoiding the pursuit of individual excellence because you are worried about the inability to correct your mindset that you know is the limiting factor in such a pursuit.
Comparing taking a 10 tick loss vs a 2 tick loss. As long as you know that the 10 tick loss will happen 20% or more of the time you take the 2 tick loss, you have created positive expectancy in taking the 2 tick loss. That is math. However , people are so worried about the flip side of this , that the trade may hit profit before the loss , even though it may be less than 80%, that they ignore such metrics and simply say - set and forget.
It is not easy. But I believe that to be a truly successful trader, we must address such issues. The way I see it is to journal extensively and practice practice practice. Only then can you be confident of your trade management skills and only then can you maximise your edge in the markets in which is a very slim one to start with. But pooling all your actions and ensure that every action you take leads to a positive expectancy will soon add up and edges may not be paper thin at the end.
I think the question is, what is the purpose of "set and forget"? If it truly is because it results in better results, then do it. But if it is because one has a subconscious desire to relieve himself of the responsibility of the trade, then this is counter-productive.
I had one such trade recently. It was a perfect opportunity, executed perfectly, but after about 20 minutes I knew it wasn't working as planned. Because of my desire to take the easy route and "just let the trade work," it cost me, as I got stopped out. Maybe it wouldn't have worked that way some other time, but that is not the point. The point is that I actually was lazy, I saw it wasn't working, yet I ignored my gut, which said to close the trade (and even reverse perhaps). In a way, I was going to blame the market for my loss, because after all, I did not interfere and just let the stop get hit. So, if the set and forget is for this purpose, in my view it's something that needs to be addressed.
I guess I am exploring the question about 'better results'. In reference to my situation, I now have a method and way of working that I believe in and it appears to be a good fit for my personality. I am building trust by trading my plan as rigidly as possible and using a set and forget approach to get a sample of trades to use as a baseline.
One thing I am fearful of is having more variables, such as trade management rules, which could make it more difficult to assess what is working or not. If I was backtesting then acceptable sample sizes could be achieved for all sorts of variables and combinations. But I am live forward testing and my method has too many discretionary elements to be coded. So it's a long process!
Do you think that this can impact managing trades as well? There is a lot of discussion about moving a trade to breakeven, just to get risk (pain) free, rather than doing so for better results.
I'm leaning to the view that whatever you have proven to yourself to work (and continue to prove) and therefore trust will be the best option.
I fall into the active trade management camp. However I don't just move my stop closer arbitrarily. I trail stops behind significant price action using predefined rules.
There is a saying in trading 'Don't be a dick for a tick'. This is what often happens with a set and forget approach. The trader enters a trade with a 10 tick stop and 25 tick target. Price then goes 22 ticks in his direction before reversing and stopping him out. In my opinion his trade idea was right, he was just slightly ambitious on his profit target. Never the less the market traded to his target region. Region being the key.
As with most things, this is a double edged sword. What do you do when price reaches your target region? What happens if price trades at your target but you don't get filled, and then the market starts reversing? Being too aggressive will cost you profit. Not being aggressive enough will also cost you. Testing various scenarios is the only way to figure out what is best.
Personally I find the most difficult part of trade management when price is within a tick or 2 of target. Up until that point trailing behind significant price action is fairly easy.
Isn't the nearest point where the 'region' begins really the target then? If you are watching a trade and you see some threatening PA will you be tempted to close out then and there, rather than sit it out - or would you bring your trailing stop up to this boundary.
With your trailing stop do you also have a target above, or solely trail out and just see how much the market is offering?
Trade management is most important at the beginning stages of the trade.
Once it starts to go your way and run (especially for swings), then it's sort of
a set it and forget it method because most of my targets take a few days, sometimes
a month or two. If you try to start doing things in a winning trade, you might let
emotion take over and cut yourself out of a winner. I've done it a lot. The only thing
to do in a winner as far as trade management goes is adding positions or scaling out,
which should be fairly mechanical.
