Hi everybody,it seems that everybody can enter a postion fairly easily but the main thing of trading is the exits.I have seen in this forum that many experience traders such as mike,sharky,wizard,sefstrat and others discuss there method with entry fairly well but as far as exits is concerned every thing is left on judgement.Can we discuss exits here in this thread and methods of exits based on some strategy.I Am using super trend to exit my position but still tweaking everyday to find some good exit.Can veterns show the road of exits to us.
Before you decide how to exit you need to understand how to make money in the market - u need to
1. Get a mathematical edge
2. Use money management to extract money out of it.
In essence when you go in you are betting on an outcome, therefor you must understand gambling math and figure out the mathematical edge of your strategy.
I would start with
1. The kelly formula
2. Optimal F
3. I would suggest buying "Handbookof portfolio mathematics" by Ralph Vince from amazon. This will help u understand the mathematics of gambeling in the markets (in essense - positive expectation casinos).
Having said that - the most popular form of betting exit is some type of trailing stop. The odds for this type of model is generally 55-60% losers against 44-40% winners and the win loss ratio is what makes the money. You will need to get data and backtest, and make sure you don't fall into the tar pit of doom... (a.k.a. survivalship bias)
Be advised that the true understanding of all of this is a life quest!
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Whether or not a trail stop is recommended depends on what kind of strategy you are using.
If you are well capitalized and use good position sizing (not overtrading) then it is likely you will make more without using a trail stop as you can stay in longer trends and not get stopped out on minor/moderate pullbacks. But again it depends highly on the specifics of your strategy, trail stops may be better in some circumstances..
My favorite exit is volatility spike exit, ie exit at the bottom of a stop hunt or some other very fast movement which is likely to reverse quickly.
The other exits I employ are divergence based and trend line break.
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Depends what is you strategy, of course.
Read in the internet about money management approach.
For the simple trend trending, the basics are:
1. Enter trade with, say 8 contracts ( stocks, Forex dollars, whatever )
2. When price reaches next half-cycle - sell half position ( 4 contracts ) - lock profit
3. When the price reaches next major wave high or say, Fibonachi or resistance level - sell half position again ( 2 contracts )
4. Keep the rest of your position in case you wanna catch major megatrend.
5. Of course, move your stops each time new wave up starts.
6. You may want to sell the rest 2 contracts when momentum of the market starts going against you and the wave, say higher then 5. But this is beyond your question.
The same works for downtrend.
You can invent any levels of your profits locking. It is up to you and up to how much contracts you can afford.
The main thing is to lock them whenever you can.
I got this from a great guy Burry Burns, he sells his course at www dot topdogtrading dot com
Of course, this is just a 5 % of what he teaches you there.
Summary, you can never guess correctly when to sell. You shall focus on locking your profits when there is a high possibility that it is a right point. Don't be greedy , be a professional
P.S. I am not professional yet, so the profits are still just a dream :-)
The biggest problem for me is following the rules. That is why I have decided to give this decision making to computer.
It depends on the market conditions. If the market is trending in a choppy manner, I have a trailing stop set a certain distance away from the market and just hold until that line is crossed. In slow moving directional chop, it can be hard to time the exact bottom, that's why I let the trailing stop take me out. In a sideways chop kind of market, I don't exit with stops but instead hit the bid/ask (or place an order between the bid/ask) when I feel that that market has gone too far and may reverse. Getting out on a stop can cause too much slippage in certain markets like gold and crude when the range is relatively narrow. In a fast-moving market, I will wait for an overextension in the direction of the trend, usually a high-volume spike, and exit manually on that. Such spikes usually move far enough away from the mean of the trend that it's worth getting out with a profit before any serious retracement happens. So, the answer in my case is: it depends on market conditions.
It took me a while to test this, but here are the results of a hard versus a trailing stop for the same data and same trading system.
Data comprised 2.5 years of ES 10 min bars (2006-mid 2008) -- see Fig 1.
Trading system is a simple MA crossover trend following strategy, equally weighted on the long & short side.
The stop value was in ticks and varied from 1-100; a hard stop and a trailing stop were compared.
Two order types were compared with a hard and trailing stop - close at end of day (EOD) versus good until cancelled (GTC) - to give a total of 4 systems tested.
The lines in the graph (Fig 4) are the total profit (%) for each of the 4 systems in response to varying the value of the stop used in the backtest.
It is clear that the hard stops are superior to the trailing stops. See Figs 2 and 3 for the summary results.
- Disclaimer: I subscribe to the "always use a stop" school - see Taleb's books dealing with Black Swans for reasons why...
- Hard stops are preferable to trailing stops, at least for a trend-following system (which was tested here). However, this is not always the case (e.g. as shown in the graph, trailing stops with EOD orders >95 ticks produced positive profit whereas hard stops in the comparable system produced negative profits), and the system and stops used need to be optimized (without curve fitting). Nevertheless, the fact that hard stops are generally superior illustrates my belief that a trailing stop cannot be as profitable as a hard stop for the simple reason that it is a hedge (against the trend being correctly identified) and will always exit at a suboptimal price, i.e. if you are confident in your entry signal, you should have the same confidence in your exit -- using a trailing stop reflects a lack of confidence/conviction.
- Use of optimization backtests wuch as this will illustrate whether a hard or trailing stp is best for your system. If you don't have your strategy coded to permit backtesting, you're SOL!
Last edited by Autobot; January 4th, 2010 at 03:43 PM.
Reason: Added a title
I am a bit confused by your study.
There are no profit targets in your strategy? So the exit for trade is by way of the stop order. If you only had a hard or fixed stop based on the entry price how would ever see a profit?
I like to start the trade with a fixed stop until price has moved away from the entry price enough and then switch to a trailing stop in the hopes of locking in profit if the market reverses before hitting my profit target. I am using fixed profit targets.
Sure there is a profit target, so exits are by way of profit target being met or else by a stop loss (hard or trailing). The point is that the profit target is held constant for all of the backtests, while the stop loss is varied -- in this manner, you isolate one parameter (stop value) as a variable to test the effect on profitability.
My question would then be: have you tested this on historical data to see whether this approach works? Also, how long do you keep the hard stop in place before switching to a trailing stop (time-dependent, price-dependent, ...)? Have you varied the time/price to see the effects on performance?
PS. Almost a separate issue/thread is the relative benefits of using a fixed versus flexible target -- my gut says that a fixed target should underperform a flexible target (opposite to the situation for hard versus trailing stops), but this should be tested