what kind of trailing stop are you using?

Discussion in 'Strategy Building' started by Samba, Nov 9, 2002.

  1. Several points about a very comnplex but crucial topic:

    1) Van Tharp, Trade Your Way to Financial Freedom, p. 268:

    I think adaptive [adaptive moving average] exits have more potential than any other form of exits. Some of my clients have developed exit strategies that move up [or down] with the market, giving the position plenty of room while it moves. However, as soon as the market starts to turn, these exits take you right out. They are incredibly creative and yet simple. And if the market resumes a trend, their basic trend-following system would be able to enter them right back into the market. I would strongly suggest that you spend a lot of time in this area in your system development.

    2) My sentiments exactly. Good adaptive moving averages are the closest thing to the Holy Grail in exit strategies that you'll ever find. I strongly recommend paying the $200 or so for Mark Jurik's JAMA (Jurik Adaptive Moving Average); failing that T3 by Tillson, available for free from several Internet sources is almost as good. Extensive study and testing will determine the optimal periods for different AMA's on different instruments and time frames.

    3) If, for some incomprehensible reason, you are unacquainted with adaptive moving averages, a fair facsimile in many situations can be obtained by taking an 8-period SMA of the highs and an 8-period SMA of the lows. On long positions, if the SMA of the highs cannot act as support --- in other words, price turns down and decisively violates that line ----- the odds favor closing (or reversing) the position. Ditto for shorts when the 8-period SMA the lows cannot act as sufficient resistance to prevent a clear penetration.

    4) Obvious as it may seem, the test and then violation of a clear trend line is a good guide to exits and reverses, especially when prices have traded in a channel and the trend line touches price in at least 3 places.

    5) Also run a good stochastic and be aware that the probabilities favor an exit/reverse on long positions when the K line crosses below the D line and moves below 80. Ditto on short positions when K crosses above D and moves above 20.

    6) I personally use all 3 methods combined with my proprietary matrix of a dozen or so indicators to make the best judgments I can about exits and reversals. Refining the decision making process are these two factors:

    a) I run 8-period, 2 Std dev Bollinger bands on a very fast tick chart (144). On longs, it is standard and normal to see a shallow retracement to the bottom band ---- this represents the first level of support. Often, the bottom band is tested, prices bounce off, and the uptrend continues. But on second and third tests of the band, a significant retracement or an outright reversal becomes more likely. By that point the stochastics may have rolled over and the AMAs crossed on longer time frames, increasing the chances that an exit/reverse at that point is optimal. Of course, view shorts in reverse: a bounce off the top BB followed by closely watching second and third tests in conjunction with

    b) corroborating instruments. In marginal or ambivalent cases, note what instruments that strongly correlate with what you're trading are doing. (If you're trading ES or NQ, your correlation is with the other e-mini!) If the corresponding instruments concur, action in that direction is highly indicated. If the verdict is unclear, give the trade a little more time and allow the corroborating indications to resolve themselves.

    7) As Tharp indicates so well, an exit scarcely precludes a future reentrance. I find most questions concerning exits are actually (often unacknowledged) concerns about how to distinguish shallow retracements/corrections from deeper retracements and outright reversals. No one can know in advance which it will be, but you must evolve a consistent and reasonable strategic approach to dealing with what is an extraordinarily common situation. Because my trading is extremely tight, I can afford the luxury of treating all retracements as potential reverses, for if they do in fact turn out to be bull/bear flags ----- brief pauses in a generally trending market ----- I can always reverse/reenter at a price that is usually around where I exited. Perhaps 70% of the time you are in fact dealing with a bull/bear flag, but in nearly all of those cases, I'll break even and then rereverse with the market's trend. But in the 30% or so of cases when a bona fide reversal is occurring, I'm in and already long/short from an excellent price, and able to ride the position for as long as I can. But the crucial point is that you evolve your own reasonable and generally profitable way of handling what is a garden-variety, run-of-the-mill price development.
    #11     Nov 10, 2002