For strategies that trade using take profit (TP), there is a great way to increase profitability by 15-20% (and more!), without resorting to toxic things like the Martingale system and averaging.
This is an increase in TP by a specified multiplier after each stop loss.
For greater clarity, I use my platform with bots and conduct an indicative back test.
Let's consider a hypothetical strategy in which TP is equal to the stop loss (SL), the ratio is 1: 1. I will take my Ramm trading algorithm as a basis - it is well suited for optimization.
Testing the period 2020-2021 with an initial deposit of $1000.
1) TP = SL (1: 1)
Profit + 850 $.
Not bad, okay.
And now we change one variable: we start increasing the TP value after each losing trade by a fixed value. Let take 10% relative to the value of the previous TP. This means that if the stop loss is 1000 points, then:
- 1st TP = 1000 points
- 2nd TP = 1100 points (1000 points + 10%)
- 3rd TP = 1210 points (1100 points + 10%)
The result is shown below:
2) TP multiplier * 1.1
Profit + 990 $.
Note: the yield chart has become smoother, the drawdown has not increased. The profitability itself increased from $850 to $990, that is, by 16.5%.
Does this mean that such a trick can be performed endlessly?
Let's try an increase in TP by 20% relative to the previous one. The increase, as in the case above, occurs up to the taking of the first profit. Then there is a rollback to the starting TP value.
Please, take a look:
3) TP multiplier * 1.2
Profit + $984
The profitability has not increased. But the drawdown became deeper (the place where this happened is highlighted using a red square).
❗️ This is because the effect of compound interest is included here. If the 1st TP = 1000 points, the 2nd TP = 1200 points, then the value of the 5th TP will be 2488 points and the 10th TP - 6191 points! An increase of more than 6 times compared to 1st TP will not allow the price to reach such targets: this requires a very powerful, rare market move. With a multiplier of *1.1, this does not happen.
An increase in TP within a losing series (before the first profit is taken) allows you to increase profitability if such an increase does not exceed 10% relative to the previous TP.
Otherwise, TP begins to increase exponentially and at the 5th-10th step reaches impractical levels, which are almost impossible for the price to reach.
Let's verify the integrity of this conclusion about the profitability of increasing TP using another example!
If earlier we tested the performance of the approach on the Ramm algorithm, now we will test it on a completely different one (InFractals). They have completely different logic for entering a trade. Let me remind you - I take them as an example, you can use algorithms and approaches that work best for you.
1) TP = SL* (1: 1)
Profit: + 82 $.
*SL stand for stop-loss
Well, more or less ok 😄
However, we are not looking at how the strategy works, but at the effect that an increase in TP can have (therefore, the default settings were affected). Let's go!
2) TP multiplier * 1.1
Profit: + $ 206.
Much better! The result improved by 151%. But we only increased each next TP by 10%!
- Increasing TP by a small coefficient (like * 1.1) after each losing trade can increase the profitability of any trading strategy. After the first TP is taken, its value should roll back to the starting values.
- It is better to always keep in mind the upper limit of TP, above which it will never grow. This can be from 5 to 10 steps (increases). Otherwise, the effect of compound interest will make TP unattainable for the price.
- Greed and the tactic of aggressively increasing TP (*1.2 and higher) can lead to a prolonged drawdown and threaten the safety of your funds.
- Do you want to make the described approach more conservative? It is enough to increase the TP not every time, but, for example, after 3 transactions:
- Deals 1 through 3 will have a standard TP (conditionally 1000 points).
- The 4th to the 6th: 1100 points
- From the 7th to the 9th: 1210 points.
This approach will retain profitability (due to a slight reduction in profitability), but it will secure the trade + have a positive effect in the long term.
5. If desired, you can combine the approach with a small, conservative Martingale strategy. And this will get you the best result! By increasing each trade after a loss by 5-10% (*1.05-1.1), you can also slightly increase TP (* 1.05). Combine these two approaches (risk modification and TP)to achieve portfolio impact and diversify potential trading risks.
Hope you find this trading tip useful! 😉