"Does it make sense to use an overall daily profit target?"
By Dave Mabe
Here's a good question from Hayes (name used with permission):
Hayes:
I am noticing fluctuations in my PnL during the day as the market fluctuates. For my gap up and down strategies, for example, today I am in 20 positions, and the PnL has fluctuated from slightly negative to strongly profitable and now back to modest profit. To maximize my profit, I would like to set a profit target for my day trading portfolio so I can close all positions if the profit exceeds a threshold. I am thinking I may have to do this from a Python script, which runs the explorations via Amibroker, and the script would obtain my account from TWS and then issue close orders from the Python script. What do you think of this approach?
Dave:
I get variations of this question a lot.
In general, I don't like the idea (a BUT is coming... read on)
Each trade in your strategy doesn't care what the other ones are doing.
You've created a strategy where the trades are mostly independent, which is great.
And that means that if a few trades are doing well, that shouldn't have much of an effect on other trades in the system that day, although in practice it sure feels like they sometimes move as a group.
Just like setting a profit target caps the P&L for a trade, adding an aggregate profit target does the same thing.
It could be well worth it, but capping your P&L is something you want to test first.
It would be really frustrating to exit early with a good profit, only to watch the trades continue and finish up with what would have been a truly great profit - without you.
I suspect what you'll find when you test is that it's NOT optimal to use a "portfolio profit target."
But, similar to taking partial profits, it still might make sense to do it even if it's not mathematically optimal.
The psychological toll of watching a great P&L number whither away all day can be debilitating for some.
Because of this, it's good to test it with that in mind.
BTW, I've very rarely exited a portfolio of trades like this, but I know traders who do this pretty regularly.
It's not likely to be the difference maker in your strategy, though.
Good question, Hayes, and thanks for sharing with the group!
-Dave
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