Exit Strategies

G

gifropan

Every one is agrees on the need to put a stop order when opening a position. Very little is ever written or discussed on the need to close a position with profit rather than have a trailing stop. My own experience is that trailing stops are very costly and very often eat into the majority or all of an occurred profit on a position. To avoid this one can use a stop close to the market but then you have to deal with the problem of being stopped out of a potentially good position prematurely. For some time I have been working on the idea that one should have an overall profit target for the day or the week. Then run all position until this target is reached. Needless to say I think the target should not be over ambitious. For example one targets 30 pips per day in the British pounds market, then if you are on day one and you make your target the close the position. However if you are on day three and, say you have had loosing trades on day one and two you would be behind target. Then on day three run the positions until you reach a 90 pip profit for the week, unless you get stopped out.

Would be very interested on ideas on exit strategy separate from getting stopped out.
 
This is a very important topic.

Most often people do not associate an exit with their entry.

Nor do people take into account the sentiment and pace of the market as a position they have taken unfolds.

Your expression of what and how things are done is typical of people who trade using the conventional orthodoxy.

If a person is to consider making money by trading, he will ultimately look at the fact that there is an identity relationship between an entry and an exit.

To state this in an other way to promote understanding, what I am saying is that an entry and an exit have identical characterisitcs for making money in the future.

The only reason to complete a position of making a segment of profits in a market is to begin a subsequence segment of profit making.

Thereis an identity of criteria for ending a trade because profits are coming to an end and the criteria for beginning another series of profit taking.

If you divide a days trading into a series of profitable segments, you will find that the end of one segment is the beginning of another segment.

This yields, in terms of your paradigm, very high sharpe ratios, very high R/R and there is no drawdown condition, no target considerations and you are never taken out of a trade by any protection you may invoke.

You also have shifted out of the conventional orthodoxy in a very simple manner.

The above is definitely not a possibility for the vast majority of people who are looking for some kind of trading advantage based upon successful entries without a thorough and exhaustive consideration other factors.
 
Quote from gifropan:

Every one is agrees on the need to put a stop order when opening a position. Very little is ever written or discussed on the need to close a position with profit rather than have a trailing stop. My own experience is that trailing stops are very costly and very often eat into the majority or all of an occurred profit on a position. To avoid this one can use a stop close to the market but then you have to deal with the problem of being stopped out of a potentially good position prematurely. For some time I have been working on the idea that one should have an overall profit target for the day or the week. Then run all position until this target is reached. Needless to say I think the target should not be over ambitious. For example one targets 30 pips per day in the British pounds market, then if you are on day one and you make your target the close the position. However if you are on day three and, say you have had loosing trades on day one and two you would be behind target. Then on day three run the positions until you reach a 90 pip profit for the week, unless you get stopped out.

Would be very interested on ideas on exit strategy separate from getting stopped out.
More...

Here you discuss doing a series of actions.

1. Entry

2. Stop

3. Set target

4. Exit on target or, if not reached, hold

5. If hold is longer then make up for daily targets not being met (Add to target value)

6. Hold until stopped out if new target is not met.

My first post was based on what I do and not what you do. A lot of ifferent successful trading methods are out there. Below are the alternatives that I am using; they are listed according to the topics above.

I share responsibilities with the market and usually the market is dictating what I must do.

1. I do enter at the beginning of a day. Then, after that, all of my trade beginnings are reversals when the market dictates to me with signals that I obey.

2. I do not use stops; in stead I just stay on the right side of the market by doing reversals when the market dictates.

3. I do not use targets; the market "continues" a trade by telling me I am on the right side of the market and to "hold" until further notice. I am continually moving away from the initiation price of the trade.

4. I do not make this consideration, ever.

5. I only trade intraday and as I do I make 200 to 40 actions a day. Amost all are reversals and represent profit segments in a series of profits one after another. The market dictates the segments and I take the profits of each segemnt using a reversal action.

6. I exit when the market RTH's come to a close. The overnight "risk" is greater than any risk in RTH's.

The signals that the market gives for making reversals seem to be our greatest difference and, actually, they may be the subject of your interest.

In effect, a signal for a reversal is an ENTRY signal for the next profit segment.

With others, I have suggested a strategy of taking their ENTRY signal for one direction of a trade and using it as an ENTRY signal for the beginning of a trade in the opposite direction. They monitor while a trade is on and just look for an entry in the opposite direction. When that happens they take the signal as an EXIT for the trade they have on at the moment.

At some point they may be able to do a dual thing of exiting and reentering the next trade.

Chop is a consideration and so are lateral price movements. Their is no entry with respect to either of these.

Chop becomes the "second chance" to max out on an exit once chop is recognized; we all know and use that strategy.
for lateral endings of trades that are below the "target" or when a profitmaking no longer provides additional profits, just side line on the low volume situation and wait for a volume breakout.

None of these situations have losses associated with them.

Chop or whipsaw seemingly does provide repeated losse for some. This is probably mostly the inability to take data sets while monitoring. Instead these types of traders are more likely to act (react) to single data elements that are fearful red flags for them. They have learned this through repeated failure.

Recognizing exits comes from see them as possible entries in the opposite direction. At R and S is you miss the first one, chop gives you a second chance.
 
Hi Jack

If I am to understand you correctly what you are saying is that every time a positioned is closed it is reversed. Now if this approach is applied to most trend following systems it can cause massive losses during non trading markets. Your views would be most welcomed.
 
Quote from gifropan:

Hi Jack

If I am to understand you correctly what you are saying is that every time a positioned is closed it is reversed. Now if this approach is applied to most trend following systems it can cause massive losses during non trading markets. Your views would be most welcomed.
More...

He likes to catch the REVERSALS.

I belive he works on the concept of markets cycleing with or without range expansion.

This is how he is able to (um, ideally) catch the ebb and flow and allways manage to be on the right side of the markets, at least in theory.

Doing it in practice is a bit tougher.

JJ
 
To trade up to 200 trades a day surely all cannot come out right not to mention the accumulation of commision charges unless one operates like or as a market maker.
 
Quote from gifropan:

...For some time I have been working on the idea that one should have an overall profit target for the day or the week. Then run all position until this target is reached. Needless to say I think the target should not be over ambitious. For example one targets 30 pips per day in the British pounds market, then if you are on day one and you make your target the close the position. However if you are on day three and, say you have had loosing trades on day one and two you would be behind target. Then on day three run the positions until you reach a 90 pip profit for the week, unless you get stopped out.

Would be very interested on ideas on exit strategy separate from getting stopped out.
More...

This is discussed many times before in the past at ET.

http://www.elitetrader.com/vb/search.php?s=

It's simple.

Backtest you strategy to determine what your profit target goal should be for the day, week, month, quarterly or year.

For example, lets say your backtest shows you should be making 80 ES points for Jan, 72 ES points for Feb, 92 ES points for Mar, 67 ES points for Apr and so on.

It doesn't make sense to set a monthly goal for next month of 115 ES points even though you know that other traders are able to achieve such numbers.

My point, don't make the newbie mistake of listening to someone that uses a completely different strategy than you...telling you for example that 1.5 ES points per day is a realistic goal when your strategy has either a negative expectancy or has a max of 1.0 ES points per day.

Simply, you could be achieving maximum results out of your strategy but fooling yourself along putting stress on your trading because your trying to live up to the expectations (goals) of another trader that's using a strategy completely different from you.

Thus, if you want to achieve what the other trader is doing...

Use his/her strategy and not yours.

However, if your strategy for example shows via backtesting you should be achieving 2.5 ES points per day and your real trading is only producing 1.0 ES points...

That should tell you where the real problem is at...it's you.

Profit goals won't be achieved until you resolve why your sabotaging your trading.

This is when your trading goals for the day, week, month et cetera should not be based upon points nor dollars.

Your goals should be based upon following your trading plan.

Just the same, if your not a profitable trader...

You should not be having goals based upon profits.

Your goals should be based upon following your trading plan.

For example, give yourself a certain number of points for following your trading plan per trade.

You can then set trading plan goals per day, week, month et cetera that's based upon a particular number.

Start by doing something simple like ranking your trades from 0 to 10 with 0 being the worst and 10 being the best.

As time goes by you can get even more detailed via ranking each particular aspect of the trade:

* Entry into the trade

* Trailing Stop Management

* Exiting the Trade

* Contingency Plan Management (what to do when another pattern signal appears while you still have an open position).

Regardless, it all starts only after you've backtested your method to determine its real potential.

This is much more realistic in comparison to listening to someone else telling you what you should be achieving when that other trader is using a different strategy along with having a different trading style (he may trade only the mornings while you trade only the afternoons).

By the way, I'm a strong believer that your exit strategy should have similar aspects of your entry strategy to keep things simple and to allow for quick adapting when the market changes...

A market that will change and you need to be able to adapt to avoid drawdown periods that can deplete your trading capital.

Example, if your entry is based upon moving averages...your exit should have something involving moving averages.

Mark
 
My main problem with the exit and entry strategy being the same is this. In trend following models a lot of the profit is lost before a reversal, hence profit take, is signaled. I admit that if a system is designed for ranging markets as mentioned by JJ earlier, and the market stays in a ranging mode then, effectively one is liquidating and reversing at or close to maximum profit level. Perhaps the exit strategy should be different for trending and ranging markets.
 
Quote from gifropan:

My main problem with the exit and entry strategy being the same is this. In trend following models a lot of the profit is lost before a reversal, hence profit take, is signaled. I admit that if a system is designed for ranging markets as mentioned by JJ earlier, and the market stays in a ranging mode then, effectively one is liquidating and reversing at or close to maximum profit level. Perhaps the exit strategy should be different for trending and ranging markets.
More...

The point is not to use an exit strategy that's completely different (has nothing in common) with your entry signal.

I am not talking about for example...take a Long signal and only exit the trade when its bearish version appear as a Short signal.

You show know the many components that make up your entry strategy and some of those components should also be part of your exit strategy.

This is only a consideration if your having problems with your exit strategy.

Thus, if your not having problems while using an exit strategy that has nothing in common with your entry strategy...

More power to you.

However, if your using an exit strategy that's problematic while it has nothing in common with your entry strategy...

You need to research the merits of inputing a few things from your entry strategy into your exit strategy.

Simply, backtest it.

Mark
 
Hi Mark

I am now clearer about what you mean. For example if my entry criteria is say, for example, when the slope of the moving average is a certain degree then the exit strategy could be when the moving average is crossed ( i.e. somehow involves the moving average)but this would not necessarily be a new entry position, hence a reversal. I think, in principle, I am OK with that.

Bob
 
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