Kreslik.com - traders community since 2006

Hi there all you pirates,

Having a good plan for exiting trades is important because your exit strategy will determine:

Size of your profits
Size of your losses
Length of your trades
Amount of your risk
Size of your position
your percentage of winners
your avg. winner : avg looser ratio
your total return

I´m just reading / implementing / testing my way through different exit strategies.

At this point I was just wondering:

What kind of experience has been made with exit strategies by all the pirates from kreslik.com?

What are you considering for setting S.L.?
What do you do to reduce risk when the trade moves in your way?
What is your prefered way of formulating Profit Targets?
How do you lock in/protect your profits, without cutting your trade to early?
How do you measure the efficiency of your entries / exits?
Are you treating shorts and longs seperate or symmetric?
Are you running different exit strategies at the same time, and how do you combine/mix them?
What parameters are you using?
Are you doing all this with fixed parameters or do you link them to i.e. volatility or S/R to adapt to the markets?
Are you changing the settings when profit targets have been reached, or do you just exit?
Are you changing the settings when your entry signals have been lost or any other change of market situation occurs, or do you just exit?
How do you link all these matters to your sizing / money management?
Do you change your sizing while a trade is on its way?
What other questions do you consider important and what are your answers?

So, I hope that this is going to be a fruitful pirate discussion and therefore
I start with the following contribution.

all the best,
peter


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I`ve uploaded a highly relevant document I`ve found on exit strategies into the download section. Its a .pdf of a presentation chuck lebeau gave on tradestation World 2004. It´s a good summary of the importance of exit strategies coming up with lots of ideas on how to use volatility for S.L., Sizing, P.T. and Trailing/reduction of risk/conservation of profits......

I think the exit strategies mentioned are quite interesting and, thought Lebeau is a system designer with a lot of experience, their application seems worth a try.

There is a good thread on exactly these exit strategies at the tradestation forum. That´s where I`ve downloaded the .pdf as well as all .eld files and some explanations on how to use / implement these stops.
https://www.tradestation.com/Discussion ... c_ID=32011

(You have to be a TS customer to use their forum)

A lot of interesting thoughts on exit strategies in general as well as some of the backgrounds / initial thoughts of the above mentioned exit strategies can be found there:
http://www.traderclub.com/discus/board.html

thought the forum seems abandonded and highly spammed, I recommend highly to go directly here:
http://traderclub.com/discus/messages/1 ... 20070515am

(Thats where you get if you click on 'Traders Club Bulletins' in the link previously given. If I´ve got it right, no login is necessary, otherwise the only prerequisite would be providing your eMail)

The bulletins by chuck lebeau are somehow old (about 2000), but seem still applicable with slight adaptions. I think they are very inspiring and worth reading. Lebeau has been working together with van tharp as well as alexander elder among others, that should provide some relevance.

More explanations on Lebeau's "Chandelier Stop" can also be found in alexander elder's book: "Come Into My Trading Room".

So, what do you do?

I just wanted to provide a jump table for some of the above mentioned bulletins by chuck lebeau I`ve considered inspiring for planning exit strategies:

Bulletin 14 Using Average True Range for Exits
http://traderclub.com/discus/messages/1 ... 19991017pm

Bulletin 32 Adaptive Money Management Stops
http://traderclub.com/discus/messages/1 ... 19990251pm

Bulletin 33 Are Your Money Management Stops Too Large or Too Small?
http://traderclub.com/discus/messages/1 ... 19990520pm

Bulletin 34 Trailing Stops
http://traderclub.com/discus/messages/1 ... 19991207pm

Bulletin 35 Trailing Stops - The Chandelier Exit
http://traderclub.com/discus/messages/1 ... 19991048pm

Bulletin 41 Doubly Adaptive Profit Objectives
http://traderclub.com/discus/messages/1 ... 20001148pm

Bulletin 44 Switch Time Frames For Better Exits
http://traderclub.com/discus/messages/1 ... 20011035pm

Bulletin 47 ATR Ratchet
http://traderclub.com/discus/messages/1 ... 20070120pm

Bulletin 29 Importance of Exits
http://traderclub.com/discus/messages/1 ... 19990103pm

Bulletin 40 Why Use Multiple Exits?
http://traderclub.com/discus/messages/1 ... 20001150am

Bulletin 17 Measuring Exit Efficiency
http://traderclub.com/discus/messages/1 ... 19991012pm

Bulletin 23 Long Trades vs Short Trades
http://traderclub.com/discus/messages/1 ... 19991216pm

Hi guys,

again a link to TSforum. Here you can find an implementation of LeBeaus
ATR Ratchet Exit:

https://www.tradestation.com/Discussion ... c_ID=24729

as described in

Bulletin 47 ATR Ratchet
http://traderclub.com/discus/messages/1 ... 20070120pm

Where the basic Idea gets summarized as:
"The basic idea is quite simple. We first pick a logical starting point and then add daily units of ATR to the starting point to produce a trailing stop that moves consistently higher while also adapting to changes in volatility. The advantage of this strategy over the original Parabolic based exit is that when using the ATR Ratchet we have much more control of the starting point and the acceleration. We also found that the ATR based exit has a fast and appropriate reaction to changes in volatility that will enable us to lock in more profit than most conventional trailing exits. "

There is a lot of space for creative tinkering with this stop thought the reference price and starting point where ratcheting ist begun can be set at will, as well as the ATR Length and the Ratchet amount. Some Ideas making use of these features are described in the above mentioned bulletin.

best regards,
peter

Peter,

This is a huge topic for which you have provided a lot of good reading material. I've personally spent months coding and analyzing different exit techniques, so I'll offer my two-cents...

Exits are integral to any trading system and the exit strategies are dependant on the goal of the system. For Pirate trading systems, the goal is to grab as much profit as quickly as you can and then run. The best strategy in this case is to use a single stop and a single profit target.

For any system, I find the best stops are placed just outside support or resistance. Price based SRs (i.e. levels where price has visited before and did not cross) work better than calculated SRs (e.g. pivots, ATRs, fibs, etc.). Dynamic SRs are price based and work well for stops.

The best targets are just inside price based SRs, however for Pirate trading systems that is not really practical. In this case, a fraction of the ATR or one of the dynamic fib levels make a good target. The fraction or fib to use is dependant on the system and market conditions (e.g. is the system trading with the trend, countertrending, or ignoring the trend?).

For trending systems, the target requires a different strategy than scalping. I've only tested up to 3 exits (I see the LeBeau uses more). In general, a single target works better than 2 targets, but 3 targets work better than 1 target. Again, the best targets are at price formed SRs.

Trending systems work best with stop managment. Calculated trailing stops degrade profitability. Using a trailing stop as an exclusive exit strategy gives up too much profit. However moving stops once a target is hit reduces system risk and locks in profit.

The way 3 targets works is once the 1rst target is hit, then move your stops to breakeven which gaurantees a profit for the trade. If the 2nd profit target is hit, then the stop turns into a trailing stop, moving from price SR to price SR as price moves in your direction. The third target should be a distant SR. If price seems to have good momentum, you sometimes want to consider moving the third target out to a further SR. Also, if price seems to be losing momentum or it's nearing the end of the day, I'll start squeezing the trailing stop and moving the 3rd target into the area of price action.

Another piece of the puzzle is how much should be taken off at each target. I did a lot of backtesting on this subject. I've found that 50%, 25%, 25% works well. The first target is usually scalp like. A decent scalping system has 70% plus wins. Good trending systems with win rates of 35% to 45% can be extremely profitable. A 3 target scale out strategy combines scalping profitability with trend system big profit potential.

Trading with the buyzone indicator looks like the type of system that could utilize a 3 target scale-out strategy. Capturing a few end-to-end days (like the DOW over the last couple of days) with the 3rd target can make your year . I have not tested the buyzone strategy, but it looks like it has potential.

Regards,

David

Hi dbw451

I am wondering what your thoughts are about how much leverage to use in the Forex market for a new trader? Say with a $500, 1000 and 2500 account?

Thanks,

Plunder and Pillage Pips and Banks Today

Patch
In VA
God Bless You and Protect the USA

Hello peter_77_peter & dbw451,
Thank you both for your excellent discusssion here; and also thank dbw451 for your Amibroker codes.

A big part of trading is staying in the game. To do that, risk for each trade should be less than some proportion of your total capital available. That proportion is dependant on the type of trading system, but most traders like to keep risk of any individual trade under 2% of their total equity. For scalping type systems and for large traders, this percentage would usually be much less.

An initial starting capital of $500 to $2500 is not very much. Given the volatility of forex markets, you're actually forced to accept risks greater than 2% of your total capital. That can be ok as long as you have a fairly high winning percentage trading system. With small starting capital, I personally would not recommend going higher than 5% of capital for any single trade.

There is much to trading beyond a good system. For any new trader, I would recommend trading with a demo account until you've consistently made a profit for a least one month. In addition, you should practice your system using charting software with tick playback (e.g. eSignal, Ensign, Sierra, Ninja) so that your entries and exits become second nature. Trading is a lot like golf. You can read about the game and about how to swing the clubs but until you constructively practice and play, you'll never become proficient and consistent enough to earn money at tournaments. All traders are trying to do the same thing; make money. You have to be better than most to succeed.

Regards,

David

Here is a discretionary exit strategy that I've designed, but It hasn't been officially "tested". Feel free to review the idea and let me know what you think.http://kreslik.com/forums/viewtopic.php?t=779

This exit strategy uses 3 take profit targets. The first TP is intentionally placed relatively close to your entry, and the spreadsheet will tell you what the minimum pips will be for TP1, but the only purpose of TP1 is to cover a specified percentage of your expenses (losing trades) based on a statistic that you will need to input. The statistic is, out of 20 trades, how many go immediately against you without hitting TP1?.

TP2 and TP3 are for making the money. Here is a quick screen shot in case you didn't visit the above link.



Typically the expense covering TP1 will cost you about 30% of your position size. Obviously this could be reduced if you wanted to only cover 50% of your expenses.

There is a second way to employ this method.

Well, the first method is to move your stop to BE when TP1 is hit. This means there are 3 situations that can occur:

1. You hit TP1 TP2 and TP3 with no issue

2. You hit TP1 then are stopped at BE

3. You are stopped without hitting any TPs, in which case the TP1s from your other trades will cover this loss.


The second method is to not move your stop once TP1 is hit. This will simply reduce your expenses -- while undermining the calculations that determine the quantity of TP1. TP1 is calculated in a way that covers your expenses if you move stop to BE when TP1 is hit.

Hi 4x=0,

I think your concept of covering your expenses is sound money management. I've done several studies of various trading systems using 3 target exits and moving stops in various ways. I can make some comments about your analysis:

- I'm not sure if by BE you move the stop to your entry price or a calculated price that would result in zero net profit for the trade. In either case, if price volatility is high, there will be a high probability that the BE stop will get hit. I've learned that it's best for small TP1s to move my stop to a price outside a price based SR and then once price moves further than the current market volatility, move the stop to BE. In some cases I'll use the low/high of the previous 5-minute bar as my SR and in other cases I'll use swing highs and lows and in other cases I'll use price congestion areas.

- the real target of the system is TP2. I think your ratio of lots supports that idea. TP2 works best if it's not some fixed number of ticks/pips, but rather a price just inside some support or resistance that is determined from the price chart. This could be more or less pips than the 65 shown in your spreadsheet.

- there is actually a 4th situation that can occur in your example:

4. TP1 and TP2 are hit, then the system stop is hit.

This case will actually occur much more frequently than hitting all three targets.

- moving a stop to BE greatly affects overall system profitability. A 70% system can easily turn into a 35% system. However, it basically eliminates a trade's risk and makes it a 'free trade'. The overall system profitability will be less, but the max system drawdown will also be less. Capital preservation is very important.

You are thinking about the right things.

Regards,

David

thank you very much!!

dbw451 wrote:- I'm not sure if by BE you move the stop to your entry price or a calculated price that would result in zero net profit for the trade. In either case, if price volatility is high, there will be a high probability that the BE stop will get hit. I've learned that it's best for small TP1s to move my stop to a price outside a price based SR and then once price moves further than the current market volatility, move the stop to BE.

Interesting idea. Do you have any ideas on how to streamline the process of placing/canceling/replacing stop and TP orders for each trade? I thought it was already fairly tedious and risky to do manually.

What are basket orders? is this something I could use to automatically cancel/replace specific orders when price reaches x price?

- the real target of the system is TP2. I think your ratio of lots supports that idea. TP2 works best if it's not some fixed number of ticks/pips, but rather a price just inside some support or resistance that is determined from the price chart. This could be more or less pips than the 65 shown in your spreadsheet.

I'm not sure what you mean by "some fixed number". I almost think you are insinuating that 65 pips/ticks from your entry could not possibly coincide with an s/r level.

For example

entry: 1.2057 +65

TP : 1.2122

- there is actually a 4th situation that can occur in your example:

4. TP1 and TP2 are hit, then the system stop is hit.

This case will actually occur much more frequently than hitting all three targets.

Yes i know about that 4th situation, but It is not significantly different than one of the other situations so I left it out.

- moving a stop to BE greatly affects overall system profitability. A 70% system can easily turn into a 35% system. However, it basically eliminates a trade's risk and makes it a 'free trade'. The overall system profitability will be less, but the max system drawdown will also be less. Capital preservation is very important.

You are thinking about the right things.

Regards,

David

again thank you for this valuable information