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Gaining an edge from your exit

  • #21
  • May 12, 2010 12:53am May 12, 2010 12:53am
Quoting Davidee
I think that's just a myth, or at the very least not 100% correct. Entries can have an edge and therefore do (at least to some extend) matter.

Don't get me wrong, I don't doubt that it's possible to have a profitable trading system that uses random entries and an exit that provides an edge (in this case the exit would most probably be closing the trade quickly if it goes against you and letting the winners run), but entries do matter....
I've yet to see proof that random entries can really make money consistently. Until proved wrong I believe is a bunch of bullocks.
Trading = a mirror to your human flaws. Fix them or be fixed.
  • #22
  • May 12, 2010 2:33am May 12, 2010 2:33am
Quoting mr.marketz
I do not have any math data on this, but will contribute the following...

The biggest impact on my trading came from truly understanding how important it is to know the "mark-up" percentage of your business. If you ask a traditional business owner what their profit margin per product or service offering is, they'll usually be able to tell you. So the hot dog vendor that buys his hot dogs for $ 1.00, and then sells them @ $1.50 is operating on a 50% profit margin (or mark-up). However, when you ask a trader what their profit margin is......
This is a very good example you quoted.

I have the same method for gaining an edge on profit targets but obviously this depends on your trading method. It wont work for everybody.

But on contrary, I find that if hotdogs are getting old, I'd sell them for a cheaper price above the $1.00 level. Because if you put that into my trading method, the trade has lasted more than it usually has and is more vulnerable to any wild swings or economic data releases.

Then from there you'll buy new hotdogs and start fresh again.

http://media.rd.com/rd/images/rdc/sl...dogs-05-ss.jpg
  • #23
  • May 12, 2010 2:51am May 12, 2010 2:51am
Quoting mr.marketz
I do not have any math data on this, but will contribute the following...

The biggest impact on my trading came from truly understanding how important it is to know the "mark-up" percentage of your business. If you ask a traditional business owner what their profit margin per product or service offering is, they'll usually be able to tell you. So the hot dog vendor that buys his hot dogs for $ 1.00, and then sells them @ $1.50 is operating on a 50% profit margin (or mark-up). However, when you ask a trader what their profit margin is... well...
I've never looked at it this way, interesting point of view. Thanks.
  • #24
  • Edited 3:37am May 12, 2010 3:22am | Edited 3:37am
Quoting mr.marketz
I do not have any math data on this, but will contribute the following...

The biggest impact on my trading came from truly understanding how important it is to know the "mark-up" percentage of your business. If you ask a traditional business owner what their profit margin per product or service offering is, they'll usually be able to tell you. So the hot dog vendor that buys his hot dogs for $ 1.00, and then sells them @ $1.50 is operating on a 50% profit margin (or mark-up). However, when you ask a trader what their profit margin is......
I think nobody in their right mind would dispute the logic you are offering: ask anyone whose business is of a trading nature whether they would want to sell a product at, or below cost.

So far, so good.

Nevertheless, even with your stance on 'traditional trader ideology' you will most likely have done some research that led you to the conclusion that there IS a market that would favourably accommodate your strategy. What I mean by that, is that you need to have confidence (through trial end error, research, testing of any sort) that more times than not your hot dogs will sell at a price higher than you bought them for in the first place.

By the same token, if your profit target does get hit significantly less times in a large sequence of attempts, you will end up losing money.

You say that you 'know your mark-up'. That would stipulate precisely what I have said above - namely that you have researched and found an edge in the same way that a hot dog trader has found that on average he can sell enough of the tasty goods for a price higher than at which he has purchased them.

Failure to realize your goal/aim is possible in both. Even if you know your 'mark up'. The possibility of your clients not turning up to buy at $1.50 any more (because of the tube strike or whatever can affect your business) in the same way that your profit target might not be reached any more because of a shift in market behaviour.

Exit is only another word for retail (sales) price of a product. You need to consider and research it - whether you call it mark up of you business or anything else that describes the way you intend to make profits.

Your fixed TP level does simply indicate that your strategy is 100% mechanical - based on whatever reward-to-risk ratio. Before you implemented that strategy, you will no doubt have thought about precisely what that EXIT for each trade will have to be, relative to the loss you are willing to take in case the TP will on occasions not be reached.

regards
daytrading

P.S. That trader ideology you are discarding so quickly can make quite some difference on the bottom line over the long term. Take two hot dog traders. One with your thinking, i.e. sell what you sell for your fixed price and everything else rots if not sold (or in other words losing trades) and take the other hot dog seller who, after he realizes that he won't sell at the same fixed price on a given day, reduces his price to get rid of at least some of the goods for a smaller profit (or smaller loss) than simply letting them rot and taking a full hit.
Enter Signature
  • #25
  • May 12, 2010 3:44am May 12, 2010 3:44am
Hi DT, good to see you back here, hope you're well. Your post on timed exits, there's a weeks worth of research right there...

FXEZ's excellent post reminds me of something else to consider which I now consider obvious, but thinking back... 12 months ago, it wasn't at all. Thinking of the orders on the opposite side of your trade, as the momentum of (my) breakouts rely on stops being tripped, if price later revisits that level, I'm concerned. Stops don't get tripped twice. However, on a reversal play, if it was a good entry then, it's probably a good entry later, as there will be bigger players positioned to get in at this cheaper price. For that reason - and loooong extensive testing bears this out - I never move to b/e on reversals, and always do on a breakout.
  • #26
  • Edited 9:04am May 12, 2010 4:27am | Edited 9:04am
Quoting soso
I've yet to see proof that random entries can really make money consistently. Until proved wrong I believe is a bunch of bullocks.
I agree; I don't believe that serious professionals take the random entries idea seriously. If long term success was as simple as cutting losses quickly, and letting profits run, then writing a winning EA would be child's play, and I expect we'd see a much lower trader failure rate. I still stand by what I posted here. Of course, even if it were so, the markets would gradually adjust to compensate for this type of inefficiency.

Moreover, I would question the widely held belief that exits are more important than entries. Here are some of the frequently given reasons, and my attempted refutations:

"Exits are more important than entries because Van Tharp (or some well known author) says so".
Explanation here.

"Exits are where you close the trade and bank the money".
P/L is the difference in pips between entry and exit. Mathematically, entry has just as much bearing on P/L as exit.

"Two traders enter at the same level, one buys and the other sells. Both can profit, depending on how they exit; therefore entry is inconsequential, and exit is key".
This is true only if neither trader uses stoplosses (see my comments below on floating losses). If both use stoplosses an equal distance from the entry level, then the one who made the 'poorer' choice of entry will likely get stopped out before the other.

"If you exit every winning trade when $20 ahead, and every losing trade when $10 down, it's obvious that you'll win in the long run".
This doesn't take win rate into account. Everything else being equal, taking 2:1 RR trades will result in approximately twice as many losses as wins.

"You can enter anywhere, because if you hold onto any floating loss long enough, it will eventually return to profit".
...... or you get margin called, whichever happens first. The idea that "a loss is not a loss until the trade is closed" is very dangerously flawed. Floating losses are very real.

"It's impossible to predict price, therefore entry doesn't matter, and the only way to profit is through your exits".
If it's impossible to 'predict price', or at least act on the balance of probability, then it's impossible to gain an edge from either entries or exits. Skilled trade management implies some kind of 'predictive' ability in terms of deciding whether a trade is more likely to bloom further, or not.

"Exits are important because it's possible to be profitable with a win rate that's significantly less than 50%".
That ignores the fact that exits are partially responsible for win rate. For example, the tighter I set my initial SL, the lower my win rate (because more trades will get stopped out). The way in which I manage my trades can also have a bearing on my win rate: the the extent to which I'm willing to let a win slip backward into a loss, in order to give price some room to move, for example.


I welcomed this thread, because I was hoping that some veteran traders might share specifics of their exit strategies. The topic of entry is discussed many times more often than that of exits. The fact that exits are rarely discussed suggests to me that either:

 

  1. exits are the Holy Grail, a secret too that's much too valuable to disclose publicly; or
  2. profitable exit strategies require a high degree of discretion and finesse, that's too complex to explain in a forum post; or
  3. balancing the factors involved in exits is so problematic that it doesn't really matter how we exit.

Exits are more problematic than entries, no doubt, more so because they additionally involve managing account risk, and emotions come in to play because there's money on the line. But just because something is difficult doesn't necessarily mean that it's where the edge must lie. In fact, I would suggest the opposite: an edge can only ever be the result of exploiting known (and provable) criteria.

Finally, IMO we're talking semantics, at least to a certain extent. For example, if I use S/R to take a low risk entry (allowing a tight SL) that ultimately results in a high RR trade, does kudos rightfully belong to the entry, or the exit? I think it's possible to make a valid argument either way.

  • #27
  • May 12, 2010 4:44am May 12, 2010 4:44am
Hi Hanover,

Unless I misunderstood Tharpe (and ultimately Tom Basso on whom the example was based in the book 'trade your way to financial freedom'), the 'random entry' illustration was used to exemplify the importance of money management and position sizing over entry points.

All in all, each variable (entry, exit, MM, PS, Comp. trade freq. etc.) has its significance and dependence in any constructed system of trading.

regards
daytrading
Enter Signature
  • #28
  • May 12, 2010 6:57am May 12, 2010 6:57am
Quoting daytrading
Hi Hanover,

Unless I misunderstood Tharpe (and ultimately Tom Basso on whom the example was based in the book 'trade your way to financial freedom'), the 'random entry' illustration was used to exemplify the importance of money management and position sizing over entry points.

All in all, each variable (entry, exit, MM, PS, Comp. trade freq. etc.) has its significance and dependence in any constructed system of trading.

regards
daytrading
DT, thanks for your response.

I just re-read pp 200-1 of Tharp's book, where Basso made his studies on coin-flip entries. The system consisted of random entries, a trailing stop that was 3x an EMA(10) of the ATR, and consistent 1% sizing. He apparently ran it on 10 different markets (not specifically forex). The win rate was 38%, which was "about average for a trend following system". He claims an 80% success rate with a fixed (one contract) size, and a 100% success rate when sizing was 1% fixed frac (if I understand the text correctly).

I recall a post of yours where you said that "FX has short trends and no directional bias except carry. His (Jacko's) view of this asset class being the most 'trendy' is delusional at best." Given that the success of a random entry system that cuts losses, and lets profits run, is profitable to the extent that markets trend (on average), is it reasonable to assume that forex is more dependent on getting entries right than other markets? (of course we're generalizing here: no mention of specific pairs, timeframes, etc)
  • #29
  • May 12, 2010 7:34am May 12, 2010 7:34am
I am certain most have their own oppinions when it comes to exits, and as we can see the ultimate goal is to come up with the best result for every one of our trades. One thing we all seem to agree with is the fact that markets cannot be predicted, so for many not being able to predict is the most frustrating thing when it comes to exits. Do I get out now? It went in my direction but it has now gone against me... Finding what works will take many years but once find it make sure to set it in stone.
However most will focus their trading on entry and give little to no attention to exits.
  • #30
  • May 12, 2010 7:37am May 12, 2010 7:37am
Quoting hanover
DT, thanks for your response.

I just re-read pp 200-1 of Tharp's book, where Basso made his studies on coin-flip entries. The system consisted of random entries, a trailing stop that was 3x an EMA(10) of the ATR, and consistent 1% sizing. He apparently ran it on 10 different markets (not specifically forex). The win rate was 38%, which was "about average for a trend following system". He claims an 80% success rate with a fixed (one contract) size, and a 100% success rate when sizing was 1% fixed frac (if I understand the text correctly).

I...
Hi Hanover,

There comes the dilemma: 'how to define a trend'

Lets assume for sake of keeping the discourse short and concise that trends do exist in FX (and that as a contained asset class, FX operates very different from commodity or equity trends).

I personally describe price behaviour in FX as short term directional but that is by-to-by.

To answer your query: yes and no.

Firstly yes, because the derived edges in FX are often very small in comparison to other markets. That in practise means your window of opportunity must be chosen carefully and effectively. If compared to equities for example, which are built for gains (especially indices), turning points are less frequent and prolonged directional price movements are smoother than in FX.

Secondly no, because over-optimization on entries will inevitably subject any method to the associated noise of a highly liquid instrument like FX (I have to add that a certain amount of liquidity is desirable of course for efficient execution).

The whole matter has to be resolved through carefully balancing all the variables. That possibility exists in principle, but not indefinitely. What I mean by that is this: market dynamics force traders to be vigilant and adaptive with their methods and phenomena. No rigid and fixed model will continuously work - not without adjustments based on fluid market dynamics.

Based on the above, I would conclude that any decision in trading should never be based on a 'coin flip'. simply because it does not make good business sense. If you are indifferent whether you want to be either long or short at any given moment, it should be clear to you [the trader], that there is no real opportunity present upon which you should act.

If you walk across the fruit and veg. market at the end of a business day and the guy shouts "3kg. of apples for £1", because the trader has to pack up and does not want to take the surplus home for shortage of storage, you are presented with an opportunity - because you might know the apples are still fresh and the going rate tomorrow will be £3 - - that is an opportunity because of a price imbalance. It can only be acted upon if all conditions are met: the trader knowing the market (i.e. what the going rate for apples is, the possibility of storage, the leverage to purchase and the opinion that the price tomorrow will most likely offset the risk taken now).

You would not buy if the price was high or if you have already apples in your possession at a high price (which would be equal to flipping the coin).

Sorry, too long post.

regards
daytrading
Enter Signature
  • #31
  • May 12, 2010 9:02am May 12, 2010 9:02am
Quoting daytrading
Sorry, too long post.
On the contrary, a very comprehensive reply; many thanks.
  • #32
  • May 19, 2010 5:31am May 19, 2010 5:31am
Hi all,

Have been reading actively on what you guys had said and I have been impressed by everyone contribution.

I have read finish Van Trap Book and am particular interested in Volatility Based
SL.

May I have a MT4 codes for the trailing stop loss that you guys are using? I would love to test our this in a trending system.

I have tried searching on some others but am often confused by the many parameter required and thus in vain.

Basically I would love to have a ATR based trailing stop loss system that auto adjust its SL based on the recent 20 days movement in price.

Thanks in advance.
  • #33
  • May 19, 2010 6:11am May 19, 2010 6:11am
Quoting IdentifyTren
But on contrary, I find that if hotdogs are getting old, I'd sell them for a cheaper price above the $1.00 level.
Valid point, IdentifyTren. Daytrading also had some very logical perspectives on this way of thinking.

However, as logical as I know this concept seems to be, my psychology won't allow for it. And I know better than to mess with good old Mr. Subconscious Mind (he's a bad man, and he'll cripple my ass if I don't treat him right). Case in point...

You're sitting on an order, TP/SL firmly in place. She's been doing the sideways zigzag all morning long. Now she's starting to look like a "no go". You're down 20% on your overall cost of the trade, and you make an executive decision to dump the goods before things worsen. You close her out, and then price rallies to your previous P target.

The above mentioned scenario is a MAJOR psyche killer for me. I can handle being wrong. What I can't handle is being right, and not getting compensated for it. It's easy to get carried away with decision making once there is money on the table. Therefore, when I have money on the table... I stop making decisions. I know that this is a contrary way of thinking for most traders, fortunately for me most traders are losing money.

MM
  • #34
  • Last Post: May 19, 2010 7:50am May 19, 2010 7:50am
Quoting mr.marketz
Valid point, IdentifyTren. Daytrading also had some very logical perspectives on this way of thinking.

However, as logical as I know this concept seems to be, my psychology won't allow for it. And I know better than to mess with good old Mr. Subconscious Mind (he's a bad man, and he'll cripple my ass if I don't treat him right). Case in point...

You're sitting on an order, TP/SL firmly in place. She's been doing the sideways zigzag all morning long. Now she's starting to look like a "no go". You're down 20% on your overall cost of the trade,...
I agree with your post Mr.Marketz ...
I think the major factor here is 'experience' and 'backtested data'. Its different for every trader, every plan, and every trade..

Longer term trades I allow more movement and swings and let them ride, sticking to plan with set stoploss and profit target. Finding a good trade is not always easy, thats why when we do, should maximize our return on it. But days like fridays with NFP, i'd look to reduce my risk, end the week relaxing, and start fresh next week.
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