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Statistical profit targets, and my experience
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Statistical profit targets, and my experience

  #1 (permalink)
Every Day I'm a n00b
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Statistical profit targets, and my experience

Ok so I have a basic strategy. It does well without any sort of fitting, so I don't fit it to the market at all. But I need to fit my reward/risk setups.

I decided, surely a set profit target and set stop loss is the "correct" approach.

Well, the stats told me otherwise. Sort of.

Trade fires at beginning of day (RTH), and if stop/target not hit, closes at end of day 15 minutes before RTH close.

I set my stop at 2-5% (I tweak the parameters based on acct value, meaning, If a 10k acct, stop is 5%, then goes to 2% by 50k and stays there). This made the system perform better, and I control my risk; cool!

Now I set profit target, based on % of account value. This way I can set the (arbitrary) 2:1+ reward/risk ratio. My system fell apart.

No problem, I say. I will increase/decrease my reward target. As I increased my reward target, my results improved!

But wait, something's not right... as dug, I found that my profit target was hit 0.27% of the time. That means my system effectively would close at the end of the trading day for whatever profit, unless it got stopped out during the day at my set stop loss.

This was totally counter-intuitive to what I thought would happen. My profit targets were killing my system, until I set the parameters so far out that they were effectively non-existent.

My point is this - TEST EVERYTHING! You never know what will work, and what won't, until you test for yourself. Evidence will provide answers, and never trust your gut intuition. Prove it first.

-Jimmy
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  #3 (permalink)
Market Wizard
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FABRICATORX View Post
Now I set profit target, based on % of account value. This way I can set the (arbitrary) 2:1+ reward/risk ratio. My system fell apart.

No problem, I say. I will increase/decrease my reward target. As I increased my reward target, my results improved!

But wait, something's not right... as dug, I found that my profit target was hit 0.27% of the time. That means my system effectively would close at the end of the trading day for whatever profit, unless it got stopped out during the day at my set stop loss.

I don't know your system, and of course therefore haven't done the testing and gotten the stats as you suggest. Doesn't mean I don't have an opinion, of course. ()

I would say this is a specific instance of a general idea that you should not arbitrarily cut your profits. I know there are a billion books that say you should go for some risk/reward ratio, but that just means that if your trade had more potential, you won't get it.

Probably some methods would not have had the type of results you got, but in general, does it make sense to cut your profits just because they reached some number, without regard to what the market is doing? Perhaps not. Now, if your method involves something like closing out at a certain level on volume profile, or fading a range or something, then that's different. But it looks like your method involves trying to catch a trend, and when you're in a trend, cutting it short is not the thing to do....

(I confess that I will often try to grab a profit just to be sure I still have it. However, that's just personal cowardliness, not good strategy. )

Obviously, you need an exit strategy. In your case, it's just the end of the day. Many people would use something based on price action, and some would use some particular level. But the automatic limitation based on a certain R:R will kill a trend-based method.

There have been dozens (maybe hundreds) of threads addressing this topic; it would be hard to say that there has been a resolution, probably because some traders trade against ranges, and others trade with trends (and many will go either way based on conditions.) I would say that the overall consensus probably has been not to set limits, although many people do believe it is valuable in a sense of having an overall quit target for the day, more as a psychological thing that a strictly technical one.

Bob.


Last edited by bobwest; October 2nd, 2015 at 02:37 PM.
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Every Day I'm a n00b
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I totally get it too. The idea didn't click until I found out for myself; basic "rules" of trading don't always fit wherever you plug it in - it NEEDS to match the system and your personality.

This system is super dumb, with very little thought beyond trend continuation. It uses no logic beyond that, as it trades strictly probabilities. "If this happens, then that tends to happen too."

My next test is to go beyond RTH, as it trades futures, to see if profit targets are eventually hit. My market "close" would have to be Friday afternoon I guess.

I previously tested profit targets using ATR, PSAR, of various time periods, but left too much on the table in comparison to simply closing at end of day.

Thanks for your insights @bobwest

-Jimmy
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Market Wizard
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My experience is that using limit order profit targets generally do just that: limit your profit.

I have found that having no profit target is generally better. Most people don't like this, because sometimes you may give away a lot of open profit.

I'd guess that over 75% of my strategies have no profit target.

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  #6 (permalink)
Every Day I'm a n00b
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@kevinkdog so then do you just close them at a certain timeframe like this one does?

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-Jimmy
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  #7 (permalink)
Market Wizard
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FABRICATORX View Post
@kevinkdog so then do you just close them at a certain timeframe like this one does?

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Depends on the system.

Like today, one of my ES systems went short early, then reversed and went long and held until the cloe (no profit target). Worked out well this time...


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  #8 (permalink)
Every Day I'm a n00b
San Tan Valley, AZ/USA
 
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Lol I was just thinking about today. My systems killed it today, but it was a trend followers dream too lol. More of an exception than the rule. Good job man.

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-Jimmy
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