Exit and Risk Analysis
Q: Can the Trade Log help me set my ideal risk profile?
Yes. Based on your own style of trading, you may gain benefit from examining your average loss as a percentage of equity, which in turn will help you fine-tune your risk profile in the Calculator. Watch this video and we’ll show you how:
Finding The Best Exit To Use
(We have also discussed this topic in our article here).
We recently received this question:
Q: “When one sets up their stop loss and take profit criteria, is it assumed that the trader for the most part initiates that trade and lets it run its course . . . either hitting the profit target OR hitting its stop loss? I am trying to reconcile using that approach and then tracking over time one’s success versus entering that same trade and exiting BEFORE either target is hit due to an “intuitive” sense that it would be best to exit based on some price action or time in the trade, etc. Basically I am asking if a trader who prudently tracks his system would enter a trade and let it run to either the stop out or achieve the initially intended profit target.”
And our answer:
We generally don’t advise on strategy issues, just because there are SO many good ways to trade, and none of them is better than another – per se. So much depends on one’s own personal approach and strategy.
But here’s what we do when we launch into a new strategy and work with it for awhile:
We set up a few parameters in the Trade Log for the different exit plans we are considering using, for example:
- – TP @ 20
- – TP @ 35
- – Trailing Stop 40
- – Trailing Stop 60
- – Exit 78% Fib
- – Exit double top/bottom
- – Trail Stop behind fractal
- (and you can add… – Intuitive Exit ___ )
Then as we trade that strategy, we enter each trade into the Log and go back and fill in the number of pips that we would have made with each different exit plan. In your case, I would suggest that you trade using your intuitive exit as your live approach during this testing phase, because that is the approach that is going to be the hardest to honestly measure in hindsight as an alternative – if you didn’t actually do that as price was unfolding.
Then after several months of tracking your trades, you’ll be able to have a good pool of your own data and can see at a glance what approach works best over different market conditions. There will always be times when one approach will work better than another on a particular trade, but when you get a bunch of trades together and start averaging out the results – that’s when you really start to learn something valuable. We recently did this and found one of our exit plans gave us 300 more pips over a month than the other exit plan we were using.
Even after you make your decision, keep tracking this data for awhile. The more trades in your data pool, the more reliable your conclusion will be.
The point we are trying to get people to see is that if you work it right, and use the best tools in an intelligent way (which we try to help people do), you yourself can be your own best teacher and can find things out about your trading that no one is ever going to teach you.
Creating a What-If Comparison Between Two Different Exit Approaches
If you want to teach yourself how to trade you have to roll up your sleeves, ask these questions and do the work to find out the answers for yourself. Answer questions like:
- Am I better to scale into a trade or go in all at once?
- Am I better to scale out of a trade or pull all my profit out at once?
- What would different take profit values do to my overall results?
- If I tighten my Stop Loss will I make more money or lose more money?
- Am I using the best possible exit plan for my strategy?
In the following video we show you one way you can set up these kind of comparisons within the Log. We take the example of a trend trading system that enters at every fractal break, and we address the question ‘how many times should I leg into a trade? This is another way of asking the question ‘Am I better to scale into a trade or go in all at once?’. The technique we show to do this comparison is called Creating A Virtual Mirror Account. Other what-if-analysis comparisons can be done with simple parameters added to your setup, but if you are legging into a trade or out of a trade, or if you use stop and reverse or cost-average, then you want to consider the pros and cons of using the allocation breakdown feature of the Log – and we discuss that in the video.
The video also spends a little time showing how the approach of creating a Mirror Account can be used to compare exit strategies. In fact it can really be used to compare any two or three approaches to trading the same setup.
Recording Risk-to-Reward, R:R
There is not an automatic way to display risk:reward. It’s a bit trickier than it seems because risk is established initially when you first put on the trade based on where your stop loss is. But it can easily change. Some people increase their risk by enlarging their stop as a trade progresses. Some people decrease their risk by using a trailing stop or moving the stop behind key levels as they move into profit. Some people negate risk by going to break even, etc.
All that is to say that the final reading of what your stop loss is as shown on your broker’s statement after a trade has closed may have nothing to do with the risk you initially set out to assume when you first place a trade. So with all that variability there’s nothing that makes sense for the Trade Log to automatically compute or record for you.
It’s also further complicated by the reward side of the equation. When you take a trade, you may plan a certain exit. When you’re actually in the trade though, you may get cold-feet and pull out early, or you may see technical indicators that make you think it’s wise to close early or you may catch a big move and get much more out of a trade than you initially planned to get.
That of course does not stop you from creating your own custom parameter for this. There are many ways to set this up, and you’ll have to think what’s best for you. As suggestions consider setting up:
‘planned take profit’
‘planned stop loss’
Of course, the Trade Log already gives you the parameter you can use ‘Stop Used’, to record the number of pips you initially set out as a stop.
Or you could set up a number parameter and just enter a value in there for risk ÷ reward. You can easily pull these figures from the Calculator and use the Calc type parameter to divide them. It’s really up to you how you want to set this up.
Does the Trade Log calculate R-Multiple values?
R Multiple values are used by some traders to grade their trades. The basic formula is [profit or loss pips] ÷ [risk pips].
The Trade Log does not at this time calculate this for you, because the question of risk is actually more complex than it seems. Do you use your starting stop loss for this number? Do you use the value that your stop hit after you adjusted it mid-way through a trade? What if you take your trade to break even? It’s not so easy to extract a single number for a moving target like this, so we haven’t been attracted to use it in our own trading or as we designed the Trade Log; Instead we favor the working pips concept we invented as a measure of what we really did per trade.