A New Exit Strategy by Adam White
Most traders search for entry signals for trading systems and use a reversal of the entry signal for exits. Sounds simple enough, right? But what about developing exit strategies separate from your entry method? Here, technical analyst Adam White discusses an exit signal called the CHL/LLF based on two types of indicators for exiting trades.
To be truly effective, a trading strategy requires that the trader in question hold his or her positions
whenever the risk/reward outlook of the market appears to be sufficiently attractive to warrant it.
Typically, this is based on the idea that a trend has developed and will continue for a period, long enough
for the savvy market participant to realize a profit. In some trading methods, the same indicators used to
detect the trend's beginning are also used to detect the trend's end, while in other methods, one set of
indicators will be used to define the entry point and another set of indicators to identify the exit point.
The CHL/LLF is a new exit method designed to identify a trend's conclusion and a conclusion only.
The CHL/LLF method incorporates two indicators, one of which is a filter and the other of which is a
trigger. The first indicator is called the concurrent highest lows pattern, or CHL. The second is the low to
low fall indicator, or LLF. To maintain clarity and brevity I will refer, illustrate and test only long
positions here. I contend that strategies that are effective for exiting short positions will have parallels to
the long positions that I will show here. Here, then, is the theory behind the CHL/LLF and its construction
and a test that quantifies performance.
Longer-term trend-following methods generate trading signals when the current trend reverses and moves
a given distance in the opposite direction. Thus, they have both a particular strength and a particular
weakness: they are effective at staying with a trend as long as it moves in the desired direction, but they
also suffer the flaw of giving back equity before the signal occurs.