The advantage of this technique is that during choppy, sideways markets, a trailing stop can produce losses or fail to produce any significant gains. In contrast, if your profit target is not set too far away during trending and choppy markets, the trading range is usually large enough to stop you out with profit. Because of this, profit targets will increase the percentage of winning trades during choppy markets, and this increase must occur to be profitable. Remember that you are only taking small bites out of a trade that could be potentially a big winner. Therefore, you want to increase the number of winning trades to make up for missing some big moves.

The main disadvantage is that when the market does move gready in one direction, you will not be holding a position. Depending on which market you trade, you should use a profit objective that is great enough to produce a decent profit after commissions and slippage (the difference between your exit price and your actual fill). However, it should be small enough that the percentage of winning trades is at a level that will offset your losses.

If you are going to use a profit objective stop, keep in mind that you must be able to watch the market rally well beyond your objective from time to time. The benefit is that you will be confident in knowing you have a system producing more winners than losers. In Figure 6.14, we decided to go long at the break of the high (65.3) of May 29. We went long and placed our initial stops. With this trade, we had a profit objective of

Figure 6.14 Profit objective stop. The long position was stopped out by a profit objective set at $625.

S DEUTSCHE . I 06/27/16 Q

: t

..........................;.................)..............;.................I.................i.................j.......................... 615

96 13 20 28 J 10 17 24

Vi point ($625). The very next day, we exited the position with our profit objective at 65.8. With the market closing very strong from our initial entry, we might have brought stops to break even. Two days later, you would have been stopped out at breakeven. Even though you would have lost no money, without using a profit objective stop you would have missed an opportunity to make a profit.

Figure 6.15 shows a period in the sugar market where sideways choppy trading occurs. Arrows were placed at swing high and lows to show you what would have happened if you bought and sold at these points. If you used a trailing stop (moving average), most of these positions would show little profit or breakeven trades. However, if you had used a profit objective stop of 0.2 ticks, every trade would have made you money. It is very important for traders to know what type of market they are in and use the appropriate stop strategy.

double and reverse

This next strategy is very risky and somewhat advanced. Before trying this technique, study it carefully. This is an effective strategy for you to turn your losses into potential

Figure 6.15 This chart shows how a sideways choppy market using a profit objective stop would show a profit on every trade.

profits or breakeven trades. This strategy should be used only in markets that are liquid and volatile. You want to make sure that the market partakes in wide swings throughout the day, as in the currency market or the S&P 500.

The basic premise of double and reverse is that when you are stopped out, you will double up on the opposite position to recoup your losses. With twice as many contracts, it will take half the initial move to get even. When even, you can reevaluate the current situation to make adjustments. Again this is a risky strategy, but if used correctly it can deliver great results. If you are wrong, however, this strategy could potentially double your losses. If you use it correctly, you can eliminate many potential losing trades or reduce the initial loss.

When your stop is hit, you are counting on the market continuing in that direction long enough to recoup the amount of your original loss, since you only need half the original move. Markets prone to false breakouts help this strategy, as well as those times when many stops are hit causing a swing in the opposite direction. You then use this swing to recoup your loss.

In Figure 6.16, all through May the Canadian dollar moved lower in a downtrend. If we sold on May 22 at the low of72.87, then for the next couple of days it appeared that the trade was working out. However, the market reversed quickly. If your

Figure 6.16 Double and reverse. In this scenario, losses from the short position would have been quickly compensated by gains from a double and reverse strategy.