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Hi Richard, and all --
I categorize exits in several general ways.
1. The exit from the logic of the trading system. This is usually the best exit.
Exits that can be good include:
2. Exit caused by a trailing stop that follows the price movement in the direction of the trade -- the stop portion of the Parabolic Stop And Reverse or the Chandelier stop as examples. This is often an excellent exit for a trend-following system. It requires a few bars in the trade for the exit level to catch up to the price, so this is best used with trades that hold at least a few bars. It works with daily or intra-day bars.
3. Exit caused by a profit target being met. This is often an excellent exit for a system that holds only a few bars and is never looking for the big win. In order to be a valid exit, the profit target must be the exit a substantial portion of the exits -- cherry picking is not allowed.
4. Exit caused by a time limit running down. This could be a stop strictly based on time, as in holding a maximum number of bars. Or it could be an inactivity exit, as in exit when there has not been favorable price movement within some number of bars.
The poorest exit:
5. Exit because a maximum loss limit has been reached. This is the exit of last resort. It is easy to test yourself. Beginning with any trading system, add a maximum loss stop using the ApplyStop function. Set the limit so far away that it is never hit and run a backtest. Gradually bring the stop closer. Note the system performance as the loss point is closer to the entry and the maximum loss stop is hit a greater percentage of the time. System performance usually degrades.
Moving an exit to break even falls into this last category. It is always an attractive sounding exit -- giving you a free trade, and all -- but seldom performs as well as expected. If you plan to use it, test it for yourself.
By all means --- if you have a trading system where these generalities do not hold, do not be bound by them. I am not suggesting that one solution fits all situations, or that these exits will perform in the order I have listed for your system. But do perform your own tests so that you understand how your exits work with your systems.
Thanks for listening,
Howard
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