Stocks & Commodities V. 23:2 (60-63): Partial Profits = Fiscal Folly? by Austin Passamonte

Stocks & Commodities V. 23:2 (60-63): Partial Profits = Fiscal Folly? by Austin Passamonte

Is exiting a portion of your trade before your profit target is hit a viable strategy?

Had I known that my career path would wind its way into professional trader status, I might have studied advanced mathematics with much more enthusiasm. After all, math is an exact science that does not lie. The way we assemble and interpret numbers to compile trading data may be subjective, but two plus two always equals four …or does it?

Somewhere along the way, many traders have been led to believe that taking partial profits — that is, exiting some part of a trade before the necessary profit target is hit while letting the other part “run” — is a viable tactic. The reasons for this seem to boil down to human emotions. Some followers of this practice suggest that partial gains taken early in a trade reduce stress and allow the trader to ride out the remaining contracts, while others suggest that taking partial profits protects against drawdown (maximum loss), should a trade reverse early to halfway through its execution.

NOT AS THEY APPEAR

On the face of it, taking partial profits may look like a professional tactic. It certainly has great appeal to new traders entering our game. But is it really as beneficial as it appears? If we can agree that math is an exact science, why don’t we take a few words here to compare partial-profit exit tactics with the straight exit of trades? Assuming each trade’s win/loss results happen in random fashion, we’ll look at three hypothetical trading methodologies whose results over the course of time have win/loss ratios of 80%, 50%, and 40%. Finally, we will assume our profit target to initial stop-loss ratio is always 2/1. The math used in this article is meant to serve as an example only.