Trendlines by Jeffrey Owen Katz, Ph.D., and Donna L. McCormick
Last time, Katz and McCormick measured the performance
of using this strategy as an exit rule. This time, we examine the
effect of eliminating entries that would have been taken in
instances where the trendline stop was farther than $1,250
away from the entry price.
In recent articles, we experimented
with exits to determine
whether simple exit strategies
can improve the performance
of a system with essentially
random trade entries. We have
explored a strategy that involved
a profit target exit, a
stop-loss exit and a time-based
exit, and then examined the
behavior of trailing stops.
Throughout these experiments, we used a standardized random
entry system in which a random number generator
provided us with the entries into positions from which we
could exit. In all instances, we found that exit methods could
significantly improve a system or ruin it, depending on
whether the strategies were correctly chosen and/or applied.
For example, stop-losses and profit targets of the wrong sizes,
or incorrect parameters for trailing stops, can make a trading
system perform significantly worse than it would otherwise. Finally, we found that while there is some interaction between
the two, overall, the behavior of exits seems to be
relatively unaffected by the entry methods employed.