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Evaluating Exits
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Evaluating Exits

  #1 (permalink)
Trading Apprentice
Anchorage, Alaska
 
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Evaluating Exits

Hello All,

I would be interested in hearing how you all evaluate you exits. In consideration of what qualities a good exit/exit strategy would have I came up with the following:

1. Restricts outsized losses.
2. Does not restrict reasonable market volatility.
3. Protects the majority of profits.
4. Does not forfeit profitable periods immediately following exit

Chuck Ledeau writes about evaluating exits in the following article:...Well I tried to give you guys the link but alas this is my first post here at Big Mike's so anyway...the article is "Don't Neglect Your Exits" by Chuck Lebeau.

This stands to reason, though I have been working on adding to Chuck's methodology thereby taking into account negative trades as well. So far I have been working with calculations like Avg. MFE/MAE ratio, Avg. MAE/Avg. Trade P&L ratio, etc. Anyway, it's a fun puzzle at the moment.

By the way, I am leaning toward testing all exit strategy components (Stop Loss, Breakeven Stop, Trailing Stop, Profit Target) all together rather than each component separately, but I don't have the experience base to say whether it could matter as far as producing profitable real time trading strategies, I'd be interested in hearing your thoughts on this as well.

Thanks much.

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  #2 (permalink)
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  #3 (permalink)
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Arithmetrick View Post
Hello All,

I would be interested in hearing how you all evaluate you exits. In consideration of what qualities a good exit/exit strategy would have I came up with the following:

1. Restricts outsized losses.
2. Does not restrict reasonable market volatility.
3. Protects the majority of profits.
4. Does not forfeit profitable periods immediately following exit

Chuck Ledeau writes about evaluating exits in the following article:...Well I tried to give you guys the link but alas this is my first post here at Big Mike's so anyway...the article is "Don't Neglect Your Exits" by Chuck Lebeau.

This stands to reason, though I have been working on adding to Chuck's methodology thereby taking into account negative trades as well. So far I have been working with calculations like Avg. MFE/MAE ratio, Avg. MAE/Avg. Trade P&L ratio, etc. Anyway, it's a fun puzzle at the moment.

By the way, I am leaning toward testing all exit strategy components (Stop Loss, Breakeven Stop, Trailing Stop, Profit Target) all together rather than each component separately, but I don't have the experience base to say whether it could matter as far as producing profitable real time trading strategies, I'd be interested in hearing your thoughts on this as well.

Thanks much.


I think that evaluation of exits is important, it is also not as focused on as entries. Given an AIAO set up it an exit is 50% of the actions you will be taking, if you AISO then it becomes even more % of the actions taken.

I personally think that there are a few things to consider, just as there are different kinds of entries, there should be different kinds of exits. Used for different reasons. Your 4 points touches on that and I will break down how I think about exits. All exits need not be all in all out, scaling can also greatly affect the results. However in the coin flip experiment thread you can see that on a random trade , no exit will create positive expectancy on its own.

1) Risk Exits - self explanatory, used to protect capital.
2) Targets Exits - used to capture some profit.
3) Regime shift exits - this one is used to exit a trade (either at a profit or loss) when the market state has changed and no longer in the domain where your strategy is most successful or viable. e.g. your a trend follower and the market has shown significant range bound movement possibly violating the conditions for a successful trade.

MFE/MAE, exit efficiency, hit rate, P/L etc. are great starting points but you should be looking to get answers from your statistics. For me the question i ask is simple, does this exit increase the expected value of my trade? As long as you keep in mind that the exit should be adding value then you will be on the right track. Although every system, market, and trader will be affected differently by different types of exits, adding them can frequently decrease the EV of a system or method.

Due to the variability of systems and the affect of exits, what might add EV to one system may actually be negative EV to another. This means that you need to be able to test an exit in the context of the overall method your trading. One thing I do is isolate the exit itself and start shifting my entry of my system. You can also benchmark a fixed 1:1 exit vs some dynamic exit methods to do a comparison. The goal is to determine if the exit itself is adding significant value added, how much and what changes in dynamics to the entire system may be affected.

I do not suggest testing them all at once, due to the fact that you will not be able to isolate which exits are giving you +EV or -EV. you have to approach it from a scientific method view point in order to really narrow down to a good result.

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  #4 (permalink)
Trading Apprentice
Anchorage, Alaska
 
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treydog999 View Post
For me the question i ask is simple, does this exit increase the expected value of my trade? As long as you keep in mind that the exit should be adding value then you will be on the right track.

I do not suggest testing them all at once, due to the fact that you will not be able to isolate which exits are giving you +EV or -EV. you have to approach it from a scientific method view point in order to really narrow down to a good result.

Thanks for the insight treydog999,

Focusing on how expected value is affected by each exit component seems logical, and perhaps a more simple measure of the efficacy of exits. What do you use for a baseline EV for comparison?

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  #5 (permalink)
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I gave some ideas for comparison in my original post. But you could also assume that the the exit gives you 0 expected value or negative expected value given commissions then test it as the null hypothesis .

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  #6 (permalink)
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Hello Arithmetrick...

Treydog999's response to your question was "spot on". The whole trick of exits is to match a particular type of exit to a complete system so that you end up with a positive expected value. Investigating and testing his points is the key to a good exit. One particular type of exit will never be the best... you must select your best alternative, make it part of your system, and then stick with it if your testing was accurate.

Here's my take on your 4 points:

1. Restricts outsized losses.

This is one of the foundations of successful trading. You must draw a line in the sand of when you're wrong and stick to it. If you don't keep your losses small you will not last as a trader.

2. Does not restrict reasonable market volatility.

Definitely. You will experience enough losses in this game without enduring unnecessary ones by placing your stops too tight. In most cases you are better off selecting a point where you are wrong and sizing your position accordingly than using a static stop.

3. Protects the majority of profits.

This is where trader personality comes in. "Majority" is a relative term. You have to know what you're shooting for... high winning percentage or larger Reward/Risk ratio? This will help you to determine the type of exit you want to use (trailing stop, stop and reverse exit, etc...)

4. Does not forfeit profitable periods immediately following exit

This scenario is impossible. As we all know, we can't predict the future... only in hindsight do we know whether the exit was "premature". It is better to have a plan on how to re-enter the market if a move continues than it is to bang your head against the wall trying to not exit a trade too early... that's information you'll never know when trading the "hard right edge".

Best of luck in your testing (and trading)...

Jim

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  #7 (permalink)
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One additional less metric driven criteria that might be worth considering:

If you are planning on exiting a position because you feel the move is finished, are you willing to reverse your position? If not, is it because something is happening in the market that may make price continue in it's present direction?

If you aren't willing to flip directions, maybe the correct decision should be to continue holding the position but with a smaller size instead of exiting, and if you're so convinced that the market is changing directions, then not only should you exit, but you should take the opposite site of the trade at a smaller or larger size depending your conviction.

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