All of my exits are trailing stops. I have no “take profit” objectives. The following paragraphs describe both how I will exit with a profit and how I will exit with a loss.

The algorithm that controls the stop is, once again, proprietary, but it’s fairly simple, and resembles a 3 times volatility stop as described in Van Tharp’s Trade Your Way to Financial Freedom. All I can say is that in my case, the only way that I adjust this is to make the stop slightly wider when hitting the stop will result in a loss. In my opinion, this allows each trade a better chance of closing profitably and helps me to maximize the profit of each trade. Clearly, this does not minimize my loss on any given trade, but my experience and my backtesting show me that a tighter stop results in lower total profits due to getting stopped out too many times.  Remember, the full risk control picture is the fusion of my stop loss settings and my position sizing, which I will describe later.

I believe that the urge to take profits affects all traders. We’ve all often heard that nobody ever went broke taking a profit, and that is certainly true within the context of a single trade. Taking profits too soon can certainly have a negative effect on a trading system.  In my case, I have found no mechanical way that allows me to take profits early and still perform as well as I would if I would just let the stops handle it. My personal experience and results reinforce the old adage that the way to make money is to cut my losses short and let my profits run.