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On 28 Jul 2007 at 23:26, Alex Matulich wrote:
> For what it's worth, Van Tharp has this to say:
> There is one kind of exit that is designed to get rid of losses,
> but it totally goes against the golden rule of trading of
> cut your losses short and let your profits run.
The "golden rule" Van quotes applies to one CLASS of systems: trend-
followers and their variants. While this broad class probably encompasses a
large percentage of systems, it's not the ONLY class. "Let your profits run"
only makes sense when you have an expectation of occasional outsized
profits.
If you look at another class of systems -- such as reversing or mean-
reversion systems -- you will find that "let your profits run" can easily turn a
perfectly good system into a loser. With systems like this you expect very
limited excursions before the market snaps back and takes away any open
profit. With systems like this, scaling out may make very good sense.
So my answer to Tim's original question is: it depends. I don't think you can
categorically state that any one type of exit (OR entry) is best for all systems.
It depends on the market / system combination you're trading. The only way
to really know is to backtest it and see what works best. If you can't backtest
it, because you're a discretionary trader or for some other reason, then you
have to analyze the market, see what kind of behavior it exhibits, and adapt
your exit to the market.
Gary
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