What was the random entry/chandelier exit study?

Discussion in 'Trading' started by 1a2b3cppp, Mar 3, 2011.

  1. you're not the only one perplexed by that post...
    #21     Mar 11, 2011
  2. I have no problem with your English. How could I? My grammar and syntax is terrible. I make tons of mistakes.

    I'm not calling you a fool unless you are one of those who think they proved entry is not important. I tried to explain to you why they thought so: they don't understand probability & statistics. When you execute random entries in a backtest, you are actually testing one possibility out of many possibilities. You have to average over many possibilities to get results but this is not a system but an average of many possibilities.

    I think this guy explains it better:

    #22     Mar 12, 2011
  3. danielc1


    Okay... I was joking around a little bit with my reply... But I feel an urge to tell the whole story of this exercise now. Meanly because of the black and white view on this matter.

    Many new traders(or would be traders) are looking for an edge. And many traders are trying to find that edge with an entry. If I only have an entry signal that is more (you choose)% right then wrong, then everything will fall in his place...

    The only reason why this exercise of a random entry system exist is because some people are so focused to find a good entry, that they forget that the money is made in the exit part of your strategy. It has nothing to do with understanding probability's and/or statistics. It was only brought up to make people understand that even with an random entry, you could make money with a solid exit strategy. Nobody recommend trading this system. And the reason why was because of the random entry and the lack of thorough testing of this system in real life... So too say that these people who where talking about this in the old days, did not understand probability and statistics on the basis of this exercise is a little bit of a stretch... And that, my friend, is even an more then mild understatement...

    #23     Mar 12, 2011

    The Chandelier Exit hangs a trailing stop from either the highest high of the trade or the highest close of the trade. The distance from the high point to the trailing stop is probably best measured in units of Average True Range. However the distance from the high point could also be measured in dollars or in contract based points

    Here are three simple examples: (As usual we will use long side examples. Simply reverse the logic for short trades.)

    1. Place a stop at the highest high since we entered the trade minus three Average True Ranges. 2. Place a stop at the highest high of the trade minus $1500.00. 3. Place a stop at the highest high of the trade minus 150 points.

    The value of this trailing stop is that it moves upward very promptly as higher highs are reached. The Chandelier name seems appropriate and should help us to remember the logic of this very effective exit. Just as a chandelier hangs down from the ceiling of a room, the Chandelier Exit hangs down from the high point or the ceiling of our trade.

    The reason we prefer to use units of Average True Range to measure the distance from the high to our stop is that the ATR is applicable across markets and is adaptive to changes in volatility. We can use the same formula to trade corn, yen, coffee, or stocks. If the trading ranges expand or contract our stop will automatically adjust and move to the appropriate level continuously staying in tune with changing market conditions. (Members who are not already familiar with the many valuable applications of Average True Range should be sure to review Bulletins #10, 11, 13, and 14.)

    In Dr. Van K. Tharp's excellent book, Trade Your Way to Financial Freedom, he refers to a study he conducted to demonstrate that an effective exit strategy could produce profits even with random entries. We were not surprised to see that the exit methodology he used to produce the profitable test results across a diversified portfolio of futures markets was the Chandelier Exit. (Tharp used three ATRs trailing from the highest or lowest close and used a ten-day exponential moving average to calculate the ATR.)

    Protecting Open Profits
    When we discussed the Channel Exit in Bulletin #34 we suggested that at the beginning of a trade we should use a wide stop and then, as profits are accumulated, tighten the stop by reducing the number of bars in the Channel. The same profit-protection logic can be applied using the Chandelier Exit. At the beginning of a trade the distance to the stop in most futures markets should probably be in the neighborhood of 2.5 to 4 Average True Ranges. As the trade becomes increasingly profitable we can bring the stop closer by reducing the units of ATR from the high to our stop.

    Let's assume that we started with 3 ATRs at the beginning of the trade. After we have reached our first profit level we might tighten the stop to trail the high point at only 1.5 ATRs. After the second profit level is reached we might want to tighten the trailing stop to only one ATR. We have had good results with some highly profitable trades by trailing exits as close as a half an ATR. We have found that some markets have better trending characteristics than others and we prefer to adjust the trailing stops on a market by market basis so there is no universal formula that we would recommend. The important message we want to convey is that to capture the maximum profit potential of trend-following trades the trailing stops need to be tightened as significant profits are accumulated.

    Keep in mind that although the highs used to hang the Chandelier move only upward the changes in volatility can shorten or lengthen the distance to the actual stop. If you want to see less fluctuation in the stop distance use a longer moving average to calculate ATR. If you want the stop placement to be more adaptive to changing market conditions, use a shorter moving average. We normally use about twenty bars to calculate the ATR unless there is a specific reason to adjust it. In our experience the use of very short averages (3 or 4 bars) for the ATR can often create problems when there are brief periods of small ranges that tend to bring the stops too close. These abnormally close stops may cause us to exit prematurely. If we want to have a short and highly adaptive ATR without risking placing stops that are too close, we can calculate a short average and a longer average (maybe four bars and twenty bars) and use the average that produces the widest stop. This technique allows our stops to move away quickly during periods of high volatility without the risk of being unnecessarily whipsawed during brief periods of low volatility.

    Combining the Channel Exit and the Chandelier

    We like to start our trades with the trailing Channel Exit and then add the Chandelier Exit after the price has moved away from our entry point so that the open trade is profitable. The Channel Exit is pegged at a low point and does not move up as new profits are reached. The Channel Exit will move up only when enough time has passed that the previous low is dropped from the data period of the channel. The Channel Exit moves up very gradually over time but it does not move up relative to any recent highs that are being made. This is why we need the Chandelier Exit in place to make sure that our exits are never too far away from the high point of the trade.

    By combining the two exit techniques we can use the Channel Exit as an appropriate stop that very gradually rises at the beginning of the trade. However if the trade makes a run in our favor the prices will quickly move very far away from our slowly trailing Channel Exit. Once we are profitable we need to have a better exit that protects more of our profit. At this point it would make sense to switch to the Chandelier Exit which will rise instantly whenever new highs are reached. This valuable feature of the Chandelier makes it one of our most logical exits from our profitable trades.

    As you can see, the Chandelier Exit is a very useful tool. However coding the Chandelier Exit in TradeStation is not necessarily a straightforward matter. For the convenience of our members we are posting the TradeStation code on our web site at: http://www.traderclub.com
    #24     Mar 18, 2011
  5. I tested this technique on EOD Equity data for S&P stocks and for equity indices. It does work. Things effecting the returns include position sizing as well....

    Nothing here is in the realm of the tradeable - you're talking 4% CAGR with 50-60% drawdowns. (1980-present day)
    #25     Mar 18, 2011
  6. 4% CAGR and 50% drawdowns? Just reverse the strategy and close somewhere between 30-50%

    #26     Mar 18, 2011
  7. i just posted it didn't necessary recommend it though it does work well on certain types of data. plus many people i know like the crap out of it.
    #27     Mar 18, 2011
  8. Ya but like I said whats the position sizing method?

    It matters...
    #28     Mar 18, 2011
  9. Fixed Ratio and Fixed Fractional Money Management

    maybe this is what your looking for you can take about any crap trading method and with some discipline (to endure the method) this will eventually work if you can keep your transaction cost low.



    #29     Mar 18, 2011