BackTesting Blog

Click Here to Watch the Video on Managing Your Exits

Karen Gibbs (K):    Is it different for investors versus traders?

Jackie Ann Patterson (J):  Yes, I really think it is.  I think that the time frame, the mindset that you start out with has a big effect on the type of exit strategy that you’d like to use.  Certainly if you’re entering the market with an idea of holding a position for over a year, getting favorable long-term tax treatment, you’re going to want to do something different than a swing trader. If you’re a swing trader entering the market, and you want to get gains not after a year, but after one day, or four days, that’s going to prompt you to think about exits a little bit differently.

K:    What are the key elements of a trading strategy?

 J:   Well, I think there’s two really big key pieces to a trading strategy or to an exit strategy, in particular, and one is how do you handle losses??  When do you cut losses short?  What sort of method will you use to limit your loss and be able to preserve your capital and your peace of mind in order to be able to trade again?  So that’s one side.

The second side, I think, is how to capture gains, when to take profits. It’s important to think about that also as part of the exit strategy.

K:  How do you suggest limiting the losses?

J:    Well, I think there’s a couple different ways to limit the losses.  As far as exit strategies go, looking at a particular point, a particular price, whether you set that in the market as a stop loss or keep that in mind, that’s one way to do it.

The other way is to have a particular signal if the conditions change.  That could be another way to limit losses if somebody has, for example, gotten in when price has been going up, has been passing moving averages, if price starts going down, passing those same moving averages, that might be a signal to get out, even if the position has not yet become profitable.

K:    And ringing the cash register, taking those gains.

J:    Yes, yes.  I think that’s the happy part of trading, and it’s also a part that may not get as much attention as it fully deserves, to think through what sort of situations will be the time to ring the cash register, to get a paycheck.  Does a person want to set a target and exit when the price reaches a certain point, whether that point is a dollar amount or whether that’s a certain configuration of indicators, or is a person more inclined to let winners run and do something?  Say, for example, trailing a stop along with the price as the price goes up, to match that with a trailing stop price, and in that way protect profits using a stop, as well as limiting losses.

K:  So you have to kind of match it to your personality or style?

J:   Yes.  I think that’s really a key thing, is to match the exit strategy to your trading style and to your personality and to your temperament and that will give you a boundary of the different sorts of exits you might consider. 

For example, the long-term trader might be more interested in strategies that let the winners run and go on longer versus a short-term trader might be more interested in setting some very near-term targets than taking profits, but within that context, I think it’s also important to understand the trading strategy and understand the potential performance of the trading strategy, and use that hard data to make decisions about which strategy might work out best for you.

K:    Jackie, thanks for your insight.

J:   Okay.  Thank you.

K: My guest has been Jackie Ann Patterson.  You’re watching TheMoneyShow.com Video Network.

The stock market is often said to be a fight between the bulls and the bears.   Technical analysis aims to help traders understand market behavior by studying the price action which is akin to the tracks left by the various market animals.

In last week’s market action, we can see the bull and the bear squaring off as two powerful and infrequent “tracks” showed up on the S&P 500.

Representing the bulls, we see a MACD positive divergence on the daily chart of the S&P 500, as shown in the StockFinder screenshot on the left.

Representing the bears, we have a Death Cross on the daily chart of the S&P 500, as shown in the StockFinder screenshot on the right.

Tags: Death Cross, MA Crossover, MACD, MACD divergence

Last week I wrote an article about a situation that often stymies traders who are serious about learning a discretionary strategy.   During forward-testing, many tools inadvertantly give clues as to what the next bar will do, rendering the effort useless.

One tool, however, presents a clean view of the chart at all times.   That tool is Telechart by Worden Brothers.   

See more about Telechart - click here

Here’s an example.  Can you tell from the charting (not the price action) what the next bar will do?

I don’t think so.   Click here to see the chart with one more bar.

Forward-testing - done correctly - gives a trader the chance to see a trading strategy in action does bar by bar.  Even though it lacks the emotional component of live trading, its a necessary step to learning discretionary trading.  It does take real effort though.

If you’re serious enough to do forward-testing, then you owe it to yourself to set up an environment without “cheats” that cheat yourself out of the real experience.  Telechart  is the one tool in my kit that helps me do that.

Tags: forward-testing

The S&P500 recently gave a Death Cross signal.  As you might guess from the name, the Death Cross is generally considered bearish.  

Read the Golden Crosses and Stop Losses BackTesting Report to learn about a trading strategy which relies on the Death Cross as a sell signal.

Watch my MoneyShow presentation which includes the Death Cross:

Exit Strategies for Active Investors

Here’s a good  video with live charts about the death cross, what it is and how to trade it: 

Adam Hewison on Death Cross

(the next article about forward-testing tools will be posted on this blog on Friday)

Tags: Death Cross, S&P500

Many of the tools I’ve tried subtly spoil the surprise when used for forward-testing.

What I mean by forward-testing is taking a chart, scrolling back in time - without peeking! - and then stepping forward one bar at a time.  The purpose of the exercise is to try out a discretionary trading strategy in a safe environment.   Granted it is not the same as live trading but it does give one a way to see how  the decision-making  might work, if not feel.

The trouble is that many tools give away the secret of the next bar with subtle and not-so-subtle hints about what the next bar is going to do.   These type of signs you wouldn’t really find at the right edge of a real chart, they are artifacts of display in the middle of the price history.  

Take this example at the top of this article.   Can you guess what happens with the next bar without applying any trading strategy, just looking at how the chart is rendered?

Next post will explain this example and show you a tool that’s not a spoiler.

Tags: forward-testing

Exit Strategies for Swing Traders on 6/12/2010, 8:00 AM - 9:00 AM PST 
This workshop examines key sell strategies for swing traders, including stop losses, profit targets, and more.  The material is drawn from the back test results published in the Exit Strategies reports.   The real bonus for attending live is analysis of your favorite markets.   Please bring the tickers of any stocks you are swing trading and we will evaluate different exits for them using end-of-day data in the session.    The Traders Expo is held at the Pasadena Convention Center, near Los Angeles California.

Click here for complimentary registration to attend in person.

For free live webcast of the Exit Strategies workshop, click here.

Tags: exit strategies, LA Traders Expo, Traders Expo

I want to share a couple key ideas with you.  I just answered all the write-in survey questions from the recent MoneyShow and if there was one theme, it was “how to know when to sell?”

The truth is that there is no one-size-fits all answer to that question because it depends on your goals and outlook. 

This particular moment in the market illustrates that really well.  (See chart above)  Short-term strategies such as price crossing the 20-day moving average and even intermediate-term strategies such as MACD Divergence have long since given a “sell” signal. The aggressive traders among us - myself included — have sold short and are now watchful of an opportunity to cover.

 I also follow a longer-term long-only strategy for my retirement funds.  The SPY below its 200-day MA tells me not to buy.  But is it a sell signal?  No, according to the 50/200 MA pair because the 50 MA has not crossed down through the 200 MA to give the Death Cross signal.    

 How will it play out this time?  I don’t know.  What I do know is how the strategies mentioned above have performed over the last fourteen years.  That data helped me to make the decisions about which signals to follow and with what capital.

 This brings me to the other frequently-asked question at the show:  “What is BackTesting Report?”

 BackTesting Report started as a series of e-books about the historical performance of various technical indicators and trading strategies.  I began the work because I wanted to know - for my own trading - what I might get out of these strategies, and which I might use for buy/sell decisions.

 BackTesting Report has expanded beyond the reports to videos but the concept is still the same:  to provide the data  to understand the trade-offs between the various technical strategies and pick the best strategy.

What about you?  How do you know when to sell?

Tags: exit strategies, MA, MACD

 If you have questions about BackTesting Report, MACD, stop losses, exit strategies, please feel free to

• Comment on this blog 
• Check out the newly updated FAQ at http://backtestingblog.com/faq/
• Attend one of these live sessions below

 eMoneyShow with live chat, Thurs May 27 10:55am - 11:40 EST (eastern!!)
Truth About MACD re-broadcast with BackTesting Report Editor Jackie Ann Patterson answering questions LIVE in the chat room
http://www.moneyshow.com/eshow/Las_vegas/Virtual_Show_Landing.asp  

 Los Angeles Trader’s Expo, June 12, 8-9am PST (pacific!!)
Exit Strategies for Swing Traders
This is the short-term trader’s counterpart to the recent investor’s talk on Exit Strategies.  Different mindset, different back tests, different results.  Watch in-person and live webcast.
http://www.moneyshow.com/caot/workshopDetails.asp?wkspID=5AD28705DA13495EA604782B8F67A97C&scode=018247

 San Francisco MoneyShow, Aug 19, 3:20 - 4:05 PST (pacific!!
Who Is Driving the CTIUS: Accelerator or Brakes?
Taking apart the CleanTech index illustrates one method of market analysis and delivers some insight into the high tech / clean tech world
http://www.moneyshow.com/sfms/workshopDetails.asp?wkspID=765B4047A40B457B8733D2FC919C2C65&spkrID=859182SPK&sid=SFMS10?scode=018610

MACD Divergence visible at 50 bar lookback

At the MACD Rain StockFinder webinar, a question came up about a MACD Divergence on the weekly chart of the Dow 30, as shown in the chart of the NYSE:DIA (Diamonds Trust Series ETF that represents the Dow 30). Click chart to see larger view.

The price and MACD indicator action lately on the weekly meets the basic criteria for a MACD divergence: the price is reaching a higher high while the MACD is tracing out a lower high.  During the webinar, the BackTesting Report MACD Divergence scanner for StockFinder did not mark that DIA weekly negative divergence on the default chart because price makes a higher high within 100 bars - the default lookback period.   But when the lookback period (user input DivSpan) is set to 50, the MACD Divergence on the weekly chart of DIA is marked in red.  See the chart at top.

The choice of 100 for the default lookback period was arbitrary.   Its the value used for the BackTesting Reports.  Other values were not tested.

Given that many stocks have similar price patterns of a higher high in 2008, to get a comprehensive view of all the negative divergences on weekly charts, one needs a shorter lookback period at least until Oct 2010.

Tags: MACD, Stockfinder