Stops, Profit Targets, and Total Trades Taken

Jun 9, 2008: 9:58 AM CST

I have been discussing trading strategy research I have conducted, which examines the relationship between your stop-loss chosen to the profit target chosen.  In the past, I have discussed Win Rate and Net Profit – but let’s pause to view the 3 systems’ total trades taken based on the relationship.

Please visit my earlier posts for a full description of the parameters and methods:

Does a 95% Win Rate Result in Net Profitability?
Fixed Stop-Loss and Fixed Profit Targets (effect on Win Rate)

Net profitability is a factor of a variety of inputs and considerations, one of which is total number of trades your system takes over a course of time.

The following graphs show total trades taken in a “long only” and “one trade at a time” only comparison of strategies tested with the DIA (Dow Jones ETF) from 1998 to present.  You’ll need to click on these charts to view them better.

Momentum Long Entry Strategy Total Trades Taken:

MACD Strategy Total Trades Taken:

20 Day Moving Average Cross Total Trades Taken:

As expected – and is no surprise – with a Stop-Loss of $1.00 (100 Dow Points) and a Profit Target of $1.00, all three strategies traded the most frequently, with the corresponding value of $20 having the least number of trades.

The Momentum strategy at the 1 to 1 level traded twice as actively as the Moving Average Cross, and actually more than three times more actively than the MACD strategy.

You can scan the chart for relationships that develop, and identify “what-if” scenarios, such as “How many trades might I expect to take if I raise my profit target but keep my stop constant at $3.00?” or “What would happen if I lowered my stop-loss to be more conservative and kept my profit target the same?”

Admittedly, a Stop-Loss greater than $10 is often logically unfeasible for traders, but for investors, it can come into play.  Also, it’s important to know the relationship and see if that matches up with expectations as the stop (or profit target) is increased beyond what you normally would trade.

Also, knowing this relationship is important because each individual trade will generate commissions and slippage, neither of which are good for net profitability.  If you’re shown a system which is net profitable, but for some strange reason, the vendor did not include number of trades taken, you should be suspicious because the system may be unfeasible to trade profitably due to the effect of the numerous trades taken which produce very small gains that fail to overcome commissions.

Unless you’re employing some sort of scalping strategy, it’s generally better to keep total trades lower in your strategy unless the average winning trade is much higher than the average loser.  This is certainly open for debate, but nevertheless it is critical to consider this factor when designing or implementing your own trading strategies.

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  • Morgan

    If we want to be truly successful than usage of Stop loss, Take Profit or Pending orders are vital as we can’t be present in front of monitors for 24/5 so we have to learn to use these well and luckily with a broker like OctaFX I can completely trust it since many brokers do manipulation to get our SL hit but with OctaFX there is no such thing, as they guarantee of no slippage and all the trading order are executed correctly.

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