Profitable ETF Trading Strategies: are trailing stops better than fixed profit targets??
There is a long-standing and interesting debate on the subject of when to use profit targets and when to use trailing stops for successful trades. There are passionate advocates on both sides of the debate who believe that their answer is correct for all trades, all styles and in all conditions.
My personal opinion is that the exit strategy you employ must make sense for your personality, your trading style, your goals and objectives, and in the timeframe in which you are trading.
No matter what strategy you select, it’s important for you to conduct an analysis on a regular basis to determine if the exit strategy is in tune with the market type and trading style you are employing. It is far more important to analyze your exits than it is your entries, because it is through improvement of your exits you will make a far greater positive impact on your bottom line.
It is the general consensus in our trading mastermind that the shorter your time frame, the more likely you are to find that hard profit targets are appropriate. Hard targets take you out of a position as soon as that prices reached. Conversely, the longer your average holding time the more likely you can afford to let the trend run and use a trailing stop designed to simply and easily harvest most of the trend.
Here is an example of a strategy in which hard profit targets make a lot of sense.
Suppose you have identified a market condition in which no-notice explosive breakouts that often fail are very likely. Suppose that your trading target is a large-cap, very liquid exchange traded fund that has very regular performance statistics. Suppose further that the average false breakout of this index from a congestion zone is a 1% move, and that 80% of the time the breakout will fail back to the middle of the previous congestion zone.
In this scenario a trailing stop would most likely return too much profit to make this scenario worth trading. But if you could fine tune your entry conditions and have a very tight initial capital preservation stop, you might find that reliably harvesting most of the 1% move intraday could return some very valuable returns. The only downside to the hard profit target stop would be that any breakout that continues past that move would not be available to you.
Rather than trying to design a complex set of exit strategies that would catch both the false and the true breakouts, I believe you’re better served by having a separate system to trade the true breakouts if you decide that is an opportunity and an edge that you possess.
The bottom line is: analysis of your exit strategy is a high payoff activity for the professional trader.