[00:00] A few days ago, I showed you my favorite RSI divergence strategy, and over one week, it took 33 trades, 17 winners, 16 losers. But after Friday's video, where I showed you me taking a trade, and I entered in 33 minutes
[00:16] late, I started wondering about something that I think every single trader gets wrong at some point. What if I'm taking profit too early? Because most of us spend an ungodly amount of time thinking about entries.
[00:28] We look for the perfect indicator. We look for the perfect pattern, the perfect confirmation. But once we're actually in the trade, our take profit is like super basic. We don't even think about it. Maybe it's a one to two risk to reward ratio. Maybe it's a previous high. Maybe it's 20
[00:42] pips. Or if we're being completely honest, sometimes it's just, that's enough money, I'm out. And I wanted to know how much that decision actually matters. So I went back to the divergent strategy and changed one thing. I didn't change the entries. I didn't improve the divergences. I
[00:59] didn't optimize any stop losses. Instead of taking profit at a predetermined risk to reward target, I told the strategy, if I get a bearish divergence and enter a sell position, stay in the trade
[01:11] until the RSI reaches 30. And if you get a bullish divergence and I'm in a buy order, stay in until the RSI reaches 70. Basically, don't exit because you've made enough money. exit when momentum reaches the opposite extreme.
[01:25] And the results were not at all what I was expecting. On EURUSD, the normal version won about 36% of its trades. When I changed the take profit to the RSI, the win rate collapsed to about 21%,
[01:39] which sounds terrible, except the strategy made 37% more money. So I tried it on something completely different. Ethereum. Please don't bombard the comments.
[01:51] I know the spreads are higher on Ethereum. I just wanted to go off of what chart was saying. It's a completely different chart. And that what you need to test data is use data that didn create the original experiment with normal risk to reward Just like I was doing with with HeroUSD it had a 35 win rate With the exits being the RSI extremes the 70 and the 30 it went down to 23 win rate
[02:18] Again, dramatically worse. The total profit went from $116,000 to $156,000. And when I looked at why this was the interesting part. The average losing trade barely changed, but the average
[02:34] winning trade on Ethereum went from roughly $420 to $764. That's almost 80% larger. So I hadn't made the strategy better at winning. I made it better at winning big. And that's where this gets
[02:50] useful because I think this exposes a problem with how a lot of us take profit in our trades. Imagine I give you two trades. The first one is currently losing $500. The second one is currently making $500.
[03:04] Which one do you desperately want to close? Probably the winner, which is completely backwards when you think about it. The losing trade is proving you wrong in your strategy. You're sitting there giving it every possible opportunity to recover.
[03:17] But the winning trade is proving you right. And suddenly, quick, get out before something happens. I've done this, and I'm sure almost everybody who's traded for a meaningful amount of time has done this as well. You enter, price starts moving in your direction, you're up $100, then $200.
[03:34] It pulls back slightly, and suddenly you're not looking at the market anymore. You're looking at the $200. You've mentally claimed it. That money is already yours. So when it drops to $170, you don't feel like you're still making $170.
[03:50] It feels like you just lost $30. And that's a really important distinction, because the market hasn't necessarily given you a reason to exit. The number going down on the trade did. So here's something I've started thinking about differently.
[04:03] When you're in a winning trade, don't ask, have I made enough money? Ask has my reason for staying in the trade completely disappeared Because those are two completely different questions Let say I take a bearish divergence I got my first RSI peak above the 70
[04:19] Price pushes up higher. RSI fails to make another high, coming back underneath the 70. That's my bearish divergence. So I sell. Now imagine price starts falling. I'm up 1%. So why should I exit?
[04:32] Nothing about the original idea has necessarily changed. I'm up 2%. percent. Again, why should I exit? Because 2R is a nice round number? That doesn't mean the move is finished. And that's what I like about using the RSI 30 here. I'm not saying RSI 30 magically
[04:48] predicts the bottom. It absolutely doesn't. I'm simply saying my entry was based on momentum at one extreme. So what happens if my exit is based on momentum reaching the other extreme? Now,
[05:00] the entry and exit are speaking the same language. And I think that's a much more interesting way to design a strategy. This doesn't mean your one to two risk reward is bad. And I need to make something super clear here. This test does not prove that everybody should delete their take
[05:14] profit orders and wait for the RSI to hit 30 or 70. That's not what I'm saying. Fixed risk reward has some massive advantages. It's simple, it's repeatable, and you know exactly what you're risking and exactly what you're trying to make before you enter. And psychologically, that's much
[05:30] easier on your stress levels. Because here's the downside of what I tested. You're going to lose more trades. A lot more. Look at the difference. We're talking about a strategy going from roughly
[05:42] one winner in three to closer to one winner in five. Now think about actually trading that. Loss, loss, loss, loss, win. On repeat. And that's if you have equally distributed winners and losers.
[05:56] sometimes you can get 50 losers and then 10 back-to-back winners even if the strategy makes more money over thousands of trades you might abandon it after one or two weeks because it feels broken and that's something a back test doesn't show you it doesn't show you sitting at
[06:12] a computer after six losses wondering whether you completely lost your mind and there another side to this too suppose we in a short here Price drops we up 2 Under the old rules the trade is finished
[06:25] Beautiful, there's money in the account. But under the new rules, RSI hasn't reached 30, so we stay in and price reverses. Now we're only up 1%, then half a percent, and potentially we get stopped out.
[06:37] And that's gonna hurt, because watching your trade go up into profit and then come back down to hit your stop loss hurts about as much as a kick in the nards because you didn't experience that trade as normal loss.
[06:49] In your head, you just turned a winner into a loser. And that's why letting winners run sounds incredibly easy when you read it in a trading book or see it on a chart. Actually doing it is something completely different
[07:01] because letting winners run means accepting that some unrealized winners will disappear. You cannot have one without the other. If you want occasionally enormous winners, you have to give price enough room to create one. So I think there are three sensible ways to
[07:17] approach take profit. You can use a price-based exit. Those are things like your one to two risk to reward or previous support or previous resistance, whatever makes sense for your strategy. Next, you can use a market condition exit. That's what I'm testing here. RSI reaches
[07:34] 30, RSI reaches 70, momentum has changed, trends break, moving averages get crossed, whatever objectively tells you that the conditions that you originally traded have changed.
[07:47] Or you can combine the two. And I think this third option is probably where I'd want to set the next experiment. Imagine reaching 2% profit on a trade, and instead of closing the entire trade, take
[07:59] some profit, then allow the remainder to continue until RSI reaches the opposite extreme. Now you've banked some profit, but you've also left part of the position alive if this turns into one of those
[08:12] huge bangers. I haven't tested that yet, so I'm not going to pretend whether I know it's better or not, but that's exactly what I'm going to test next. If you guys enjoyed this video, share it with your friends. Thank you so much for watching, and we will see you in the next one.