Click to view my Maximum Adverse Excursion video.  

The Maximum Adverse Excursion or MAE is a measure of how far a trade went against you.   Read this previous post for a definition.   BackTesting Reports measures MAE across thousands of trades, allowing you to use it as a metric to assess and compare trading strategies.

Of course the idea is to pick a strategy with a low Maximum Adverse Excursion.   You can also reduce the MAE (and risk) of a strategy by using a stop loss.

Tags: MAE, risk, stop, strategy

If you’ve ever wondered:

• which MACD sell signal has the best track record
• whether to sell when the MACD Histogram ticks down or wait for the lines to cross
• how far positions have dropped after a MACD by signal
• whether stop losses really reduce risk
• whether using an ATR stop is worth the effort

then you might considering investing in a copy of the MACD Sell Signals BackTesting Report.

The MACD Sell Signal Report builds on two of the MACD Buy Signals to backtest basic exit signals using MACD lines and histograms. This report gives the first look at Maximum Adverse Excursion – how far the position went against you — as a way to measure the risk of each strategy.   It also compares three different types of stop losses to reduce risk.   Read this report to find out how you would have fared by following the MACD and MACD Histogram.

 Subscribe to BackTesting Report Now or order MACD Reports separately

Tags: ATR, backtesting, exit, linkedin, MACD, MACD Histogram, MAE, Maximum Adverse Excursion, risk, selling, stop

The ATR Trailing Stop is one way to limit losses and protect profits. A stop loss order is set a multiple of the Average True Range (ATR) away from the current stock price. As the price moves in the trade’s favor, the stop rachets along with, always calculated from a better closing prices and never from worse closing prices.    This mostly keeps from giving ground once its protected by the stop, except in the case of increasing volatility as measured by the ATR.

Click here for Back Test Performance of Trailing Stops 

Chuck LeBeau popularized the method of trailing a stop loss order a few ATRs below the recent high price for a long trade. This method became known as the Chandelier Stop.    LeBeau’s Book covers other aspects of ATRs.   The best description of the Chandelier exit is in Come Into My Trading Room: A Complete Guide to Trading by Alexander Elder.

The ATR Trailing Stop is also known as a volatility stop.

Extra Insight:

In backtesting, the ATR Trailing Stop reflects each stock’s unique daily price range.  Hence it can fit each stock better than a dollar trailing stop or even a percentage trailing stop.

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

The ATR stop amount can be subtracted from either the high, the close, or the low of the day.    Each variation gives slightly different results.    The important concept is to match the stop distance to the stock’s volatility and to move it along with improving prices.

ATR stops are not offered by brokers, to my knowledge.   They are also tedious to calculate by hand.   The only realistic way to use an ATR stop is with software support.   Programmable software packages such as TradeStation can be programmed to display (and backtest!) an ATR stop.   

Click here for BackTesting Reports on Trailing Stops

(Backtesting Blog is an Amazon Associate.)

Last updated 11/11/08.

Tags: Alexander Elder, ATR, backtesting, chandelier Chuck LeBeau, exit, long, stop, stop loss, strategy, TradeStation, trading, Volatility

The Dollar Trailing Stop is one way to limit losses and protect profits. A stop loss order is set a given dollar amount away from the current stock price per share. As the price moves in the trade’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 $1 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 $1, the stop is hit, and the trade exits.

Extra Insight:

In backtesting, the same dollar stop value is applied to all stocks. This is not ideal because each stock has a different daily price range.  For example, setting the stop $1 away from the price of a $10 stock makes a fairly wide stop but the same $1 stop on a $100 stock is very tight.

As with all trailing stops, the dollar 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

(Backtesting Blog is an Amazon Associate.)

Last updated 11/11/08.

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

 The Exit Strategy is a well-defined plan specifying the conditions to get out of a trade.  

 For a long trade, exiting means selling the stock. For a short trade, exiting means buying a stock.

Extra Insight:

Having a strategy for exit allows a trader to plan with a cool head rather than getting caught up in the heat of the moment.   Backtesting the exit strategy gives a trader insight and confidence in the plan.

Most traders have two purposes for exiting:  taking profits and cutting losses. 

Sometimes both ends are served by one exit order, such as a trailing stop.    Other times, they are two distinct orders, such as a fixed stop loss and a target limit order.

A third goal of an exit strategy may be the efficient use of capital.    In that case, the exit strategy may have rules to exit a trade that isn’t going anywhere in order to redeploy the resources elsewhere.

Click here for BackTesting Reports on Exit Strategies

(Backtesting Blog is an Amazon Associate.)

Updated 11/12/08.

Tags: backtesting, exit, goals, loss, stop, strategy, trading

My trading strategies follow this Naming Convention:

[Direction]_Entry_TestPeriod_[Dataset]_Exit

where:

• Direction is either L for buying long or S for selling short.   Direction is optional and if missing defaults to L.
• Entry indicates the entry strategy used.
• TestPeriod is the abbreviated years of the test data.   The data runs from May to April.  So 0407 means May 1, 2004 to April 30, 2007.
• Dataset indicates the data vendor.   It is optional and defaults to CSI Data if not used.
• Exit indicates the exit strategy used.

If one of the above field’s parameters are varied during the test, the exact settings for the run are shown next to it.   If settings are not given, then the commonly used settings apply.

For example, L_All_9404_CSI_Timed_200day

• Trades Long (enters by buying stock)
• Enter always
• Spans the time period  May 1, 1994 – April 30, 2004
• Runs on CSI Data
• Exits on a specific time setting of 200 days

Another example, MACDH_0407_ATR3

• Trades Long (enters by buying stock)
• Enter when MACDH ticks up, settings 12, 26, 9
• Spans the time period  May 1, 2004 – April 30, 2007
• Runs on CSI Data
• Exits on a trailing ATR stop of 3

Updated 11/12/08.

Tags: ATR, backtesting, data, exit, indicator, long, macdh, stop, strategy, trading

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

(Backtesting Blog is an Amazon Associate.)

Updated 11/12/08.

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

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

(Backtesting Blog is an Amazon Associate.)

Updated 11/12/08.

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

Risk management is crucial because all trading strategies lose sometimes.    By limiting risk, a trader has a chance to survive long enough to find a way to thrive.   The topic is way too big for my little glossary but its here because I want to encourage traders to think about risk.

Extra Insight: 
Funny Carrie Underwood parody reminder to manage risk:

Backtesting trading strategies provides insight into the risk of various trading strategies.   Understanding risk is the first step towards managing it.   A complete understanding includes the knowledge that there’s always the risk of something completely unknown and unforeseen happening.

Different people have different risk tolerance and even the same person will view various risk differently.  That means you have to decide for yourself what to risk.

Here are a few “rules of thumb”:

• Don’t risk more than you can afford to lose.
• Limit the risk on each position.  1% of your trading account risked per stock is a middle-of-the-road estimate.  By risked, I mean the amount lost if the stop is hit.  No stop?  Then limit the size of the whole position to a small fraction of your account.
• Limit the total exposure of your account.   What happens if all your stops get hit?   What happens if the market gaps past all your stops.   Make sure you can handle it.
• “Blowing up” means losing 50% of account value.   Don’t let that happen!

Here’s a link to the book advertised in the video: Mastering the Trade (McGraw-Hill Trader’s Edge).

(Backtesting Blog is an Amazon Associate.)

Updated 11/12/08.

Tags: backtesting, long, management, risk, sizing, stop, strategy, trading

Size Matters

Sizing is the rule for deciding how many shares or contracts to buy.

Extra Insight:

Sizing is critical to risk management, worthwhile returns, and also making comparisions between backtesting runs.   For the backtesting runs, I use a very common and straightforward sizing:

• If there is no stop loss for the strategy under test, my backtesting trade size is 1000 shares (and the amount at risk is the total amount of the trade).
• If there is a stop loss, my backtesting trade size is the nominal risk amount of $1000 divided by the distance from the expected entry price to the stop price.   If its a next-day market order then today’s close serves as the expected entry price.   This way, the risk amount is constant for every trade but the trade size varies in both dollar amount and number of shares.

(Backtesting Blog is an Amazon Associate.)

Updated 11/13/08.

Tags: backtesting, expectancy, loss, management, risk, sizing, stop, strategy, trade size, trading