not using profit targets during strategy development

Posted By: gamadeus

not using profit targets during strategy development - 02/03/19 16:49

In the presentation linked to the financial hacker it says:

"Do not use profittargets.(If you really want to, use a profit-lock mechanism instead)."

I have trouble understanding the argument. Im basically always using a TakeProfit when developing a trade system, particularly in the beginning when I evaluate entries.

Can somebody enlighten me what is meant here, maybe even jcl himself?
Posted By: AndrewAMD

Re: not using profit targets during strategy development - 02/03/19 20:12

Argument? This is largely learned through experience and data collection. Basically, profit targets limit the potential profit of any given trade and will tend to make your system less profitable.

This concept is examined in the book Trading Systems by Jaekle and Tomasini. It's definitely worth a read, especially for its coverage of risk management.

Why run some tests and see what it does to the profitability of your systems?
Posted By: gamadeus

Re: not using profit targets during strategy development - 02/03/19 21:16

Well, I would hestitate to make that statement in general.

Certainly trend strategies get worse with a fixed TP but the same does not hold true for, say, a mean reverting strategy.

I know that book you recommended, and actually Profit Target is also discussed as an option when developing a system.

Posted By: AndrewAMD

Re: not using profit targets during strategy development - 02/03/19 22:05

And you made MAE and MFE plots per the book’s suggestion? You can get a visual indication of whether or not take profit is appropriate.
Posted By: gamadeus

Re: not using profit targets during strategy development - 02/03/19 22:18

Tbh I dont use MAE and MFE that much anymore. I think Zorro in combination with R features much better tools for analysis.

Anyway, I think you agree that there are systems where a TP might be appropriate. Which brings me back to my original question about that absolute statement in the presentation.
Perhaps that point is taken out of context, so it would be great if jcl could comment what that was all about.
Posted By: jcl

Re: not using profit targets during strategy development - 02/04/19 09:02

I do not know much situations where a TP would make sense. Suppose TP is at X and the price rises to maximum Y. If Y < X, the TP is useless. If Y > X, the TP causes a premature exit with loss of Y-X potential profit. Instead of a TP, you had then better used a profit lock or a tight trailing mechanism starting at X.
Posted By: gamadeus

Re: not using profit targets during strategy development - 02/04/19 09:09

ok that makes sense, thanks. in my old MT days I had more luck with a TP than a trailing stop, but perhaps that was also due the limited possibilties I had with that plattform

are there any profit lock or trail settings that you would recommend to use as a starting point for strategy development?
Posted By: laz

Re: not using profit targets during strategy development - 02/21/19 23:23

Feel free to read the last few notes (page 2) from my topic:

https://opserver.de/ubb7/ubbthreads.php?ubb=showflat&Number=476387&#Post476387

I asked something similar and learned a lot wink
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