The Percentage Trailing Stop is one way to limit losses and protect profits.  A stop loss order is set a given percentage away from the current price.    As the price moves in the trader’s favor, the stop rachets along with, never giving ground once its protected by the stop.   For example, after buying long, a trader may set a trailing stop 7% below the current price.   As the price moves up, the trader moves up the stop but never moves it down when the price goes down.   Eventually the price does retrace the 7%, the stop is hit, and the trade exits.

Extra Insight:

In backtesting, the same percentage value is applied to all stocks.   This is not ideal because each stock has a different daily price range — some will routinely move 3% in a day while others barely budge.    The percentage trailing stop adapts to the individual stock better than the dollar trailing stop but not as well as the ATR trailing stop.  

As with all trailing stops, the percentage trail never exits at the extreme of a movement.   Hence it always gives back some of the profits.

Click here for BackTesting Reports on Trailing Stops

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Updated 11/12/08.

Tags: exit, long, loss, stop, trading, trailing backtesting

 A Position Trader seeks intermediate-term opportunites.   Like a swing trader, the position trader is ready with a quick exit strategy but more willing to stay with a trade for several weeks or more.   

Extra Insight:  

For backtesting, I use timed 20 day exits to approximate position trading.

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Updated 11/17/08.

Tags: backtesting, exit, position trader, strategy, trading

A trading strategy might have several different types of exits, among them the Profit-Taking Exit.  As the name suggests, the idea is to bag some profits.  Cha-ching!

Extra Insight:

The profit-taking exit won’t necessarily mean selling at the top.  That’s difficult, maybe impossible, to do consistently and its often called a fool’s errand to try.

Some examples of profit-taking exits are price hitting the upper channel boundary or a pre-defined target percentage gain.

Another profit-taking exit is a trailing stop.   A stop (loss) order is put in place below the current price (or above it for a short).   As the stock price moves up, the stop price moves up too.   Different methods of trailing a stop: ATR (average true range), percentage, and fixed dollar to name a few.

I’m just listing a few possibilities here, not suggesting which one to use.

Click here for BackTesting Reports on Exit Strategies

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Updated 11/12/08.

Tags: ATR, backtesting, exit, loss, percentage stop, stop, strategy, trading, trailing stop

I previously used Quick Trading as a label for very short-term trading that lasts only a day or two.  I’ve merged this category with swing trading.

Extra Insight:

In my backtesting, the 2day timed exits are most like Quick Trading.

Updated 11/17/08.

Tags: backtesting, day trading, exit, quick in and out, swing trading, trading

A Stop Order typically comes in two flavors:  a stop loss which turns into a market order when price goes below it, and stop limit which turns into a limit order for the stop price. 

A Stop order may be either a buy or a sell.     It may be used to enter or exit a position. 

Check with your broker for the exact commands to use for your own trading. 

Extra Insight:

The stop order is typically thought of for exiting a trade, however, it can also initiate a trade.   For example, a trader buying on new highs may set a buy stop slightly above the current high.   If the price hits the new high, the stop is triggered and the buy order executes.    In this case, the cool guys say the stop was “lifted”.

Many traders use a stop order to cut losses.   Some traders also “trail” the stop by moving up the stop trigger as the stock price goes up to protect partial profits.

In backtesting, I do not use the stop limit order, just the regular stop order.    The historical price data cannot show the potential effect of our stop might on a live market — that is a known inaccuracy.   Even so, backtesting can show the benefits and trade-offs of using stop orders.

Click here for BackTesting Reports on Stop Losses

(Backtesting Blog is an Amazon Associate.)

Updated 11/13/08.

Tags: backtesting, data, entry, exit, loss, protect profits, stop, trading

A Swing Trader tries to capitalize on short-term price movements.  A swing trader will hold overnight, possibly for several days, which distinquishes swing trading from daytrading.   Of course some exit strategies are open-ended so the trade may last as long as the stock is running.  After backtesting a few we can see the average hold time for the different trading strategies and settings.

Extra Insight:

In my backtesting, the 2day timed exits apply to Swing Trading.   At that point, its clear if the entry strategy has the trade off to a good start.

Swing Trading Books at Amazon

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Updated 11/17/08.

Tags: backtesting, day, entry, exit, long, strategy, swing trader, trading

Trader Type is defined by how long a person likes to hold a position.  My categories are:

• Buy ‘n’ Hold = practically forever = no pre-defined exit
• Active Investor = measure in years with pre-defined exit
• Position Trader = measure in weeks
• Swing Trader = short term, measure in days
• Day Trader = don’t hold overnight
• Market Maker = always have an offer to buy and sell outstanding

Extra Insight:

I’m most interested in the swing trade and position trading.   I’d like to hear what readers think is the most interesting area and have set up a Buzz Dash poll.    Please vote for your favorite type:

Many experts say you need to find the style that suits you best and that timeframe is often a matter of temperment.   Maybe, but I do find my temperment changes as I see the various track records from backtesting!

Updated 11/17/08.

Tags: backtesting, day, exit, long, selling, short, timeframe, trader type, trading

TradeStation Strategy

A Trading Strategy is the collection of rules about when to enter and exit trades as well as the size of each trade.

Extra Insight:

Sometimes people say “trading system” instead and I do it too.   I really think trading system is larger than just the entry/exit strategies and includes things like record keeping, etc.

TradeStation is a software tool for analysis and backtesting with facilities for creating custom trading strategies.    The image at the top of this article is a screen shot of a very simple entry strategy that buys whenever the stock meets minimum volume requirements.    This obviously is not a tradeable strategy but is something I use as a baseline for comparison.

Updated 11/13/08.

Tags: backtesting, entry, exit, sizing, strategy, system, TradeStation, trading

Trading System refers to the whole set of rules, practices, and habits that make up the process of trading.    This includes market selection, portfolio selection, when to trade, which trading strategies to use when, entry signals, exit signals,  sizing, record-keeping, risk management.   The whole enchillada.

Extra Insight:

Even though I often use the terms interchangably, I think Trading System is bigger than Trading Strategy.

A Trading System is said to be either mechanical, discretionary, or a mixture of the two. 

Most mechanical systems are run by a computer, but they need not be.  A person could conceivably make manual calculations and monitor trades according to rigid rules.   Even in a fully automated mechanical system, the human element is present — someone must decide which system, when to turn it on, how to keep the computers running, etc.   However, backtesting is an obvious step in the development of a mechanical trading system. 

For discretionary traders, modern trading also relies on computers acting according to fixed rules.  For example, many people, wheither they consider themselves traders or investors, fundamental or technical, consult stock charts populated with their favorite analysis techniques and indicators.   Backtesting can inform the judgement of a discretionary trader by outlining the potential performance of various strategies and indicators.

Ed Seykota often says that a trader’s system is really the set of emotions he/she is unwilling to feel.  (See Sat, 17 July 2004 in his Trading Tribe FAQ).   I feel like dodging by saying the emotional side is beyond the scope of this blog.  

Now that I think about it, its not so hard to backtest a general example with software.    For example, the Rational Choice book cites a few studies that prove our human tendency for loss aversion.  To codify that, write a system with: 

• no stops in order to avoid the pain of taking a known loss,
• close targets to avoid the pain of giving profits back, and
• quick file deletion to avoid the pain of knowing its unprofitable. 

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Updated 11/13/08.

Tags: backtesting, behavioral finance, discretionary s, Ed Seykota, entry, exit, indicator, loss, mechanical s, Rational Choice, risk, signal, sizing, strategy, system, technical, trading