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Never use take profits
Article first published on October 8th, 2019.
I went swimming with turtles when I was in Barbados a few weeks ago.It was amazing.You jump off the back of a yacht in the Caribbean sea, swim out to a shipwreck where one of the staff is out feeding the turtles so that they congregate around you...My girlfriend likes them so much that when we got back, we got a big print of them to put on the wall.The way they swim in their old age is so serene and majestic.It's as if they don't have a care in the world...This is akin to how I approach getting out of trades.I follow a method similar to the Turtle Traders.I think I have spoken about this before, but I've written so much since then perhaps that I only have a vague recollection.Let's start with the main premise.We do not use take profits.Why?If we're trading macro (or in fact, using any methods), we do not know when the trend will end.We could keep the trend going forever.Even if we're currently selling AUDJPY at 72.00, the market could go to 1.00 (that's very unlikely and everything would be completely broken by then, but it's correct in theory)...The idea is to optimise profit.I do not pretend to know when a trend will end either, and always maintain that everything I do is my best guess.Based on this then, how do we really know when to bank cash?Well, for me, it depends on a few things.Primarily, we look at when risk changes.If a market turns risk off and we are following a risk on trade, then we bank.If the business cycle picks up and we start to see equities gain upside, alongside improving data, we start to take some money off.This could be 10%, 20% or another number...It's largely discretionary and is dependent on the extent to which the markets are changing...But, a good way to do this is to look at using a trailing stop loss set at a specific volatility measure.
Personally, I like to use the 20 day ATR, although you might like to be more or less conservative.Since we trade longer timeframes here at Macrodesiac, we have space to manoeuvre and really take stock of the situation we are in, without having to react so readily to short term price changes.This means that we can apply trailing stops of relatively wide margins to account for an extended move against us, and still take a good notional amount of money off the table.Remember that profit optimisation is key and because we do not know what will happen next, we want to give our long term view space to come to fruition, even if price does move against us a bit.And remember, we are looking for news flow constantly...If the market does move against us but then the macro context comes back into our favour, we can just re-add to that position.But remember.The style we trade at Macrodesiac means we start off with really small position sizes...And add...And add...As we build greater solidity to our view.Think of what we are doing as moving with the ebb and flow of cycles.Yes, it takes a lot of patience and you do have to be aware of carry as well (some assets can absolutely rinse you when holding overnight)...
But remaining in the market, even just a little bit, when you have decent conviction on where it should go based on the fundamentals...
Then you can maintain your base position and reduce anxiety when you feel the market is stretching you, and make up for it when the market eases and comes back to us.