Common Indicators best used for exit rules
- This topic has 8 replies, 7 voices, and was last updated 5 years ago by
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Hi all,
This is my first post. Some great stuff here; I just wanted to share an observation. Having taken a look around the website I notice a common theme: Standard technical indicators are often used as entry signals whilst exists are often defined by a rigid, pre-determined risk:reward preference (variables set somewhere in the code). I often see code such as:
“SET STOP pLOSS…” and “SET TARGET…”
By using predetermined, rigid exit rules we are ignoring current price action dynamics and projecting our wishes onto the market. We should be allowing the market to tell US where we should exit. If overall the end result is a positive result with a good looking equity curve you may argue that it’s fine to use such a rigid approach. Indeed in certain situations one may actually require rigid, predefined exit rules. That said my research has shown that the best way of exiting a position is to let the market give us the exit signal (whether in profit or in loss).
So how can we determine when our position has run its course? How do we know when a profitable trade or an unprofitable trade should be closed? The simplest answer is usually the best one. The logic is this: We close a profitable trade when the probability of a reversal is high. We close an unprofitable trade when the probability of a reversal is low (and the probability of a continuation is high)!
My research has shown that using commonly known indicators as exit signals rather than entry signals can have positive effect on your equity curve. For example using an RSI-overbought condition to exit a profitable long (rather than using it to enter a short). Using a combination of volume based, momentum based and moving average based or breakout based indicators to exit an unprofitable trade may save you from false positives and allow you to cut before the market runs away. Using this approach could give you an equity curve a boost. It gives your trades a chance to breathe as well as work with the dynamics of the current price action.
On a side note: one of the current limitations of PRT is the inability to build exit rules based on indications from multiple time-frames simultaneously. In addition to this a further limitation prevents building exit rules based on what a correlated market is doing. Oftentimes combining data from multiple resolutions (time based and tick based) as well as correlated or leading markets can make valuable set of filters for use by any stand-alone trading system but this requires a propitiatory infrastructure.
Hey Maz, thank you for those pearls … if you think of more let us know please.
Cheers
GraHal1 user thanked author for this post.
I have tried to use indicators for exits, but they have never been better than an ATR-based SL/TP. However, I suspect this is due to how easy it is to of curve-fit with multiples of ATR. On the other hand I have investigated systems that switch between being short and long. The entry for a long position doubles as a short exit and vice versa. If you enter based on indicators, this type of system allows it to be used as an exit as well.
If a certain event is an indication to go long, then it is an indication to not be short, and vice versa. If you want to avoid systems that constantly hold positions, you can try taking exits from another trading system, and when I say exits I mean entries. If you are programming the exit to a short, find another working system that has a decent long entry and use it to exit the short, but don’t open a long position based on that exit.
1 user thanked author for this post.
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