Wednesday, November 23, 2011

Meantrades Exit Strategies; taking huge swings with zero risk

In the past few years I have observed some of the debates which spring up regarding how to take a profit in intraday trading. There are 2 basic strategies.

  1. Take profits at a pre-determined level and go flat.
  2. Exit half a position at a predetermined level and move stop to break-even (or break-even plus enough to cover commissions).
There might be a slightly better way to achieve ideal profitability. It will require that you know the strengths and weaknesses of your system.

With regards to meantrades, there are two basic exit strategies when combined, are quite effective at maximizing profits.

The two basic techniques are as follows:

  1. When price reaches the opposite keltner band from entry, we can take our profits, go flat entirely.
  2. When price reaches the opposite keltner band from entry, we can move our stop to break even and begin using the supertrend stop as our trailing exit. 
The second option creates far more profits but it is not a smooth process. Perhaps 70% of all trades will be stopped out for zero gains. That's not an easy way to trade intra-day and can lead to overriding the rules of the system.

One solution to this is to work with a very rudimentary wave structure to determine which exit method to use.

One of the more effective structures is a double top or a double bottom. When taking the initial topping short trade take the keltner touch as the profit exit. However if price trades back up to the original top area and either stops you out for a loss and creates a fresh signal OR price simply tests the top, the second touch of keltner should be considered an opportunity to trail the trade and shoot for the moon.

Here is an example of the double top trade scenario:

As you can see the second short trade went much further and allowed us to benefit in several ways. By already having a nice profit for the day we could take our chances on a huge run with our stop at break even. This is what we should always strive for: take huge chances with zero risk.

A second technique, which I am toying with is to use a uniform exit strategy until the weekly target objective is met and then to switch over to the opposite one. In other words, if your goal is 100 pips a week and you started off the week using supertrend exits, once you reached the 100 pips you would then switch over to keltner exits for the remaining trades for that week. This allows you to trade with much less indecision and fear that you will miss potential profits. 

Something else in the back of my mind, although not yet tested, is to take some average of the MPE (Maximum Positive Excursion) and use that as the absolute exit for trades. I never really thought this was an ideal method to exit as it does not adjust according to volatility the same way that the Keltner bands do but I still remain curious as to the relative performance of applying keltner exits versus fixed exits. In order to create this exit strategy I would need to record the MPE as well as the MAE (Maximum Adverse Excursion) in my trade journal (which I don't do at the moment.)

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