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The 90% Rule – So Close to Target
We call one our 90% rule. That is basically designed for times that our mechanical objectives get within 90% or greater of full target. I can tell you without question we will never take a loss on a strategy that barely misses target. There is simply no reason to stubbornly wait out the next couple of ticks and in the meantime be willing to risk it all the way back to a full loss just because a calculated target just misses. We therefore in our minds know that if our objectives are $2.00 on a stock we will definitely have a stop adjustment if it gets to $1.80 or higher. In fact, you might want a 50% rule. It is a good idea to ratchet up your stops (when long – opposite when short) when you get halfway to an objective. This doesn’t mean you should tighten stops so much that you get taken out repeatedly the moment it retraces even a slight amount, but it should be a level where you have some action plan built into your strategy. 50% and 90% or thereabouts are good levels to build some type of risk reduction into your plan and then some means of locking in profits. We always want to give our trades room to “breathe" – do not just get jumpy and head for the exits at the first sign of a entrancement. Going back to the concepts further up in this document, if you have a strategy that has put the odds in your favor, you have to let that strategy do its work. You need to give it the chance it needs – but ratcheting up stops (or down if short) is wise and still allows that trade room to roam and get your full objectives, while at the same time giving you the relief of cutting risks substantially and rewarding yourself for getting halfway there, and ultimately trading with a trade that you know is guaranteed to make a profit, rewarding yourself for the trade getting 90% of the way there. What about “Key Levels?" There are levels that markets just have a hard time passing, up or down. All support and resistance gets broken eventually so we don’t build strategies around these levels with the fear that they cannot be broken. If the case is that our profit objective requires one to be broken, then so be it. However, you need to understand that much of trading is crowd psychology and though someone could put together a thesis on how there should be no difference between valuation of a market at 41.98 vs. 42.00 (the round number), it is a fact that traders, down to the individual basis, are the ones who are influencing these prices, and rightly or wrongly there is a lot of attention paid to key levels. Now, you might think with all the electronic and program trading out there that these “robots" ignore these key levels but it is not difficult for any experienced trader, and therefore system developer, to realize that you have to respect these levels. So even as program trading starts to dominate many markets, they are building into these models these same behaviors.
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