Most profitable way of multiple take profits.

[seb mikl]

Doing the maths on the various I can't figure out what is the most financially profitable system. 

The most common used is (for 3 TP) close half, close half, close full.

I assume the TP's are laid out in terms of risk to reward is 1:0.5, then 1:1 and then 1:2

How that looks in terms of risk: reward is 

If only TP1 is hit, close half the position, halfway to 1:1. Remaining goes to breakeven. That trade is therefore 1:0.25. -------- 4 of these = 1 loss. 

If TP2 is hit. Close half at TP1, close half again (so 25% at TP2) remaining goes to TP1. that's now 1:0.66 ------------2 of these =1 loss

Then if TP 3 is hit, you now get 1:1. 

Depending on how often you hit tp 2/3, your required win% ranges from 75% to 50%. (We can assume tp3 is infrequently hit.. as it usually is).

You need around 70% win rate.

If you just have TP2, and place a breakeven at TP1, ignoring TP 3, then you have a risk: reward ratio of 1:1 and only need a 50% win rate. 

I don't see how multiple take profits are in anyway more profitable then just a simple 1:1 trade. 

Can someone please prove me wrong? Suggest a way that doesn't just aim for every pip they can get, regardless of correct money management.

[Stanley EpsiBari Deede Nwiko]

i think you are right. they preach 1/4 and 1/5, but these are really difficult to reached except you are trading for ego.

anyway, i have seen scalpers who do really well and have been in the business for years

[seb mikl]

Stanley EpsiBari Deede Nwiko:

i think you are right. they preach 1/4 and 1/5, but these are really difficult to reached except you are trading for ego.

anyway, i have seen scalpers who do really well and have been in the business for years

What do you mean 1/4 and 1/5? 

Hmm how do scalpers adapt this model to be more profitable??

[Brian Rumbles]

I agree with you, smaller trades or 1 single trade, in terms of the 'expected value' the result should be the same. But the 2nd trade taken in such a system could be considered to martingale, but after many trades this will not scale the same as martingale and will show the characteristics of a profitability of a single trade, not taking commissions into account. 

What could be done with this system is to selectively try to take profitable trades out but this will pose other problems given enough trades. So yes no advantage basically.

One side note is that if you do this with a stock in just the right way (comes down to luck a bit too), it would give better results than a single trade if the stock goes down after buying.

eg. stock is worth $4 and you buy 1/4 position size, then goes down to $3 so you buy again with 2nd 1/4 position, then goes to $2 buy again, to $1 buy last position, then price goes up to $2:

you now have  1/4*-2/4+1/4*-1/3+1/4*2/2+1/4*+2/1=-0.2083+0.5= +0.2917.  If however the stock just went straight up from $4 to $8 then you would have  1/4*8/4 instead of the full 1*8/4 , and would have made less.

In diversified portfolios this might be done by rebalancing or reweighting the portfolio.