#016: SPENT PLENTY OF TIME WITH DIFFERENT EXIT METHODS
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#016: SPENT PLENTY OF TIME WITH DIFFERENT EXIT METHODS

One of the things, I spent really a lot of time with, are exit strategies. From the basic ones to a number of my own ideas and brand new concepts. The work on different exit methods has always paid off, despite the fact that all of them have not proved to be effective. In today’s article, I will describe to you my experience with 5 different exit methods (an article about more sophisticated methods might follow).

 

1. USD Profit Target
 

Generally speaking, the first and basic technique that will pop up my mind when it comes to an exit technique is fixed profit target. This is one of the most common techniques, that had proven for me to be a valid exit technique years ago when I was trading discretionary. What are the results of it when it comes to ATS trading?

 

I can tell that in general this technique is still usable. It has some downsides, though. The first is that most of the time the average profit per trade is dramatically reduced. And for this reason, the fixed USD PT cannot be applied to many of my systems - when I include transaction costs, some of the systems become untradeable. This happens most of the time when you apply this PT to intraday ATS.

 

The other problem is that MFE (Maximum Favorable Excursion) is in case of intraday systems much lower than the stop-loss (higher stop-losses work better for breakout ATSs), so the final RRR (Risk-Reward-Ratio) can be negative, at about 1.5:1, which is not comfortable situation for me.

 

Over the time I have found out that the best approach for intraday strategies is to compromise:

For one half of the contracts use fixed PT exit and for the other half use EOD exit (End Of The Day). This combination will help to smoothen the equity curve and is worth experimenting. The second option is to leave out EOD exit completely, convert the strategy into a swing version (from an intraday) and dramatically increase the USD PT value to a level of positive RRR. In that case it makes more sense to use USD PT and it is possible to create really interesting strategies.

 

2. % Profit Target
 

The second option that occurs to my mind is to use % based Profit Target. I have to admit that this approach is really specific. First of all, there is only a limited number of markets (especially BONDS) where I manage to apply it successfully. In most cases it is about financial markets, traded by big institutions. Further on, % based SL works much better than % PT (at least for me). To conclude, it will not work in most of the markets, but on the other side, there are some markets (like Bonds) where this is the only technique that can be used. I myself don't use it very often.

 

3. ATR Profit Target
 

The possibility to use “dynamic” exits as ATR Profit Target or Stop Loss (i.e. multiples of Average True Range at the time of entry) is very popular. For example: you have a long position, you save the ATR indicator value at the time of entry and you set up a stop-loss as a 2x ATR and profit-target as a 4x ATR. The advantage of this approach is that the exits can adapt better to volatility changes.

Personally, I like this exit method, but I don't use it so often as it may seem. Simply because USD PT still works in many cases better. But there is still an area where using it makes more sense - swing ATS strategies. For these types of strategies I can recommend this technique, you should give it a try and experiment with it to get good results.

What works for me as well is a combination of USD PT and ATR PT: simply include both methods in your strategy and the system will exit on whatever happens first, what will be closer to your entry price. For ATR PT I don't recommend you to optimize the ATR period too much - simply pick one (like 5 or 20) and keep using just this one.

 

4. Number of Bars from Entry

 

One of alternative exit methods, which is quite interesting, is to specify an exit moment as a number of bars since the entry moment. This method sounds extremely simple, but I was surprised how effective it might be. In a way, this technique might be considered as a “time-based” MFE. Since the most of the methods are trying to define the exit moment to get the best MFE value, i.e. classic “space-based” MFE, using number of bars since entry is “time-based” MFE. This is also a way how to get an interesting MFE value. And again, I found out that the best results  I can get when combining both approaches - those I have mentioned previously and adding the number of bars since entry. After all, trading and ATS development are primarily a creative process and you need to test and experiment with new ideas.

 

5. Market Internals Exit
 

Probably the most sophisticated method from my arsenal is an exit based on a change of the mood in the markets, i.e. based on Market Internals. The biggest disadvantage of this approach is that it can be applied only on indice markets.

The biggest advantage is that in most cases it works really well - what can be better than to plan your exits on the change of the market mood. This method can be perfectly used even for intraday trading. But again, I have found out that it is good to combine it with others, like USD PT, etc.

You can read more about Market Internals here.

 

Summary

 

The exits are completely separate trading category and just one single change in an exit method can give you completely different system, with entirely different quality. Sometimes, just by changing the exit method, I have managed to change the system that was failing all my robustness tests into a successful system.

The most important thing you should take from this article is: experiment and be creative. In ATS trading there is no dogma and performing all kind of experiments with all different ideas is the best way to get the best and the most interesting systems and better trading results.

 

Happy Trading!

 

Tomas

 

 

 

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