What Is More Important? Entry or Exit?
|June 25, 2012||Posted by Oddmund Grotte under strategies, trading topics|
Most traders seem to focus more on entry and money management than exit when developing strategies. It is perhaps no sense in discussing what is more important of entry or exit, but anyhow we’ll try to separate this in this short article. After all, it’s when you sell you book your profits and losses, not when you enter.
However, we need to enter a trade to get an exit. To make simulations we’ll make all entries in this article randomly. All entries are simply made by tossing a coin! Entry is on the close.
The test basket is 77 different ETFs, both equity and debt/interest rates, all listed on US stock exchanges.
The idea is to sell into strength. So the first exit is to simply sell on the first day after entry when the ETF closes above yesterdays close. Exit is on the close. Here are the equity curve:
The portfolio holds max 10 positions at a time. If there are more trades generated, the program picks ETFs randomly. There is a high win ratio, but the winners are a lot smaller than the losers. Still, this simple strategy generates 6,2% in annual return since 2000. There are just 2 losing years. However, this is without commissions. We’re using entry on close and that means there should be no slippage unless our orders move the market.
What happens if we exit on the close which is higher than yesterdays close plus yesterdays 50 days ATR (average true range)? Here is chart:
Annual return increases sligthly to 7.4%.
Personally I have never tried to enter trades at random. Before I started this test I was expecting better results, quite frankly.