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Scale-out & base profit lock-in interaction, how?

Original Question: Aim is to make 3 x the risk I take.  Therefore if I have an initial stop of 3-4% the aim is to make at least 10% on the trade. If my account equity is $9000, my risk per trade is $90 and my profit target $270 Once I reach my profit target of $270 (profit on the trade), I move up my initial stop loss to 2.6R which will be $234, wherever that may be on the chart.  This is a mental stop and not a hard stop as with the protective stop.  Or is it a hard stop placed with my broker?

First of all don’t be too strict with the exact values. 2.6R just came out mathematically when I crunched some numbers based on my own trading history with the quiet and tight pullback entry a couple years back. In practice it doesn’t matter if you go for 2.3R or 2.8R. The closer to the goal profit/loss ratio (aka risk multiple) the better.

So what you wrote is almost correct, let me explain.

The aim is to let the trade unfold and only lock-in 2.5R if it was up >3R before.

The portfolio base-profit lock-in is indeed a hard stop order at the broker. Recall that my initial stop loss evolves over time. In the beginning it’s the original stop loss, then I move it up to secure the base profit and later it transforms into a protection stop loss (Not to be confused with a trailing stop!).

Recall that the goal is always to be able to scale-out some when a trade reaches 3R or beyond. So when I place a trade I am very aware of the logical levels and I sometimes decide to go with the stop loss level which will also provide me with a more logical scale-out level around the 3R mark. Sometimes it all aligns but sometimes not so much. It’s about getting as close as possible to such an ideal overall arrangement as possible. I don’t want every second trade to trigger the base profit lock-in so scale-outs around 3R are crucial to give you more room to the downside.

You want to lock in roughly 2.5 times the dollar value of your INITIAL stop loss ONCE the trade was up >= 3R. So if the initial stop was 20k USD you want to secure a 50k USD win. The more you scale-out around 3R or above the more the price can drop before it undercut that 2.5R threshold. If you scale-out well before the trade was up 3R the rules still apply:

i) Trade was up roughly three times the dollar amount of the initial stop loss ==> Base profit lock-in stop is set around 2.5 times the initial stop loss dollar amount.

ii) Trade was not up three times the dollar amount of the initial stop loss yet? ==> Let the market do it’s magic and get initial scale-outs in place when the opportunity comes up. When the market is really directionless and when there is no established uptrend yet, you should realize some profits when you have them. It makes no sense to let many 2R wins turn into losses again. But I simply don’t have rules for that. It involves discrete trading decisions in real time to stay in a strong mental position. Be reasonable!

I do have some hard coded rules but I also follow general principles! The principles are harder to grasp but even more important. The principle to stay in a strong mental position is a major one. Every trader knows the feeling of being with your back to the ropes receiving painful punches to the gut. If you know that you will feel that way if your current 1.5 or 2R trade turns into a stop loss, then you have to exit, simple as that. I am pretty good as being truly emotionless if a 2R trade turns into a stop loss hit because I don’t overtrade.

I trade much less when the window of opportunity is closed than what many you would think. I always make sure to control open heat so that I can give the trades all the room they need. Intervals between Stock Ideas within the Membership Service will help you get a better feel for this.

But please be aware that my approach is specifically designed to let winners run well beyond 3R. My goal is not to collect only 3R or 2.5R wins. My goal is to let trades develop into 10R+ trades and I am fine when they do this with only 2/3 or 1/2 of the initial position due to early scale-outs. But the stocks almost always provide you with another proper entry setup down the road so that you can refill your size back to normal. 10% rule can be triggered anytime. A 10% move is simply too good to let it evaporate quickly, especially in a choppy and directionless environment. Major resistance level are oftentimes roughly 10% apart. So the idea behind the 10% rule is twofold, A) you scale-out some when a stock is up double percentage digits (many screen for this!) thus attracting momentum chasers who increase volatility and pullback probability and B) a 10% intraday move almost always “connects” two major support/resistance levels. In an ideal world your 3R level is located right at such an important level.

This is the overall idea and I try to “plan” a trade in advance based on the chart with all that in mind. However, I am not super strict but rather go with the flow of the chart. If it all aligns, fine! If not, also fine.

As Bruce Lee famously said: “Empty your mind, be formless, shapeless like water…”

It is super important that you apply those techniques with ease by understanding the principle ideas behind them. Don’t get lost in exact values and rules. Goal is to ride those winner AND to stay in a strong mental position by not letting solid trades turn into losses again!

I was able to combine short term swing trading and long term position trading into one fluent hybrid approach. For this to work out I had to take some of the guess work out of the equation by having a couple hard-coded rules at hand (mainly the 10% scale-out rule and base profit lock-in rule) to not get lost in the transition zone. I often enter inside the base, the transition zone would then be the actual breakout or the post breakout action. Quite often this aligns with the position being up 2 to 4 times the initial stop loss.

My stock handling methods are not a black box and require skill and patience as I just share what I do myself. I did not create a product which you can buy & use. I just perform the art of trading in real time and let you follow my actions as closely as possible w/o violating the legal boundaries. I am an active trader following the markets throughout the session ready to react to real time events. I trade what I see.

When direction is less clear I sometimes “work a trade” intraday until I have established a solid initial position, this can mean that I enter in anticipation of a QTS just to exit again 5min later. I do such things to receive market feedback which tells me a lot about the underlying currents and shifts unfolding in real time. Once the picture becomes clear(er) I wrote that insight down in my journal which happens to be my Twitter feed.

The stock picks within our Membership Service simply provide high potential stock ideas according to my believe. I provide the entry and a logical stop loss level. Once an idea is extended it will switch from “actionable” to “hold”. I will then follow up with another proper entry opportunity or a true red flag exit signal, whatever comes first. I will also try to notify members if scale-out opportunities are present via blog-posts or even public tweets.

But members are free to handle those stock ideas based on whatever method they want. Any method derived from O’Neil and CANSLIM should work.

I will support you as good as I can in applying my own techniques!

Read some more about this base profit lock-in technique here:

https://thweis.com/the-definite-guide-to-money-management/#Mind-Trick-2-Secure-your-base-profitrisk-multiple-via-scale-outs

https://thweis.com/faq/can-you-elaborate-more-on-your-portfolio-driven-rule-for-trimming-your-winners/

https://thweis.com/faq/protection-stop-level-when-the-2-6r-rule-is-triggered/

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