Using Barrier Stops In Exit Strategies by J. Katz, Ph.D., and D. McCormick
A simple technical method for exiting a trade is the break of a trendline on a chart. This article measures the performance of using this strategy as an exit rule.
In recent articles, we explored the topic of exits and experimented to see whether the behavior of simple exit strategies could improve the performance of a system whose trade entries were essentially random. Our first exploration was of an exit strategy that involved a profit target exit, a stop-loss exit, and a time-based exit. Then we examined the behavior of trailing stops. In all instances, 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. Thus far, we have found that a proper combination of even simple exit methods (for example, fixed–dollar amount stop-losses and profit targets) can substantially improve the behavior of a trading system — even turning a random, losing system into a profitable one! We also learned that employing stop-losses and profit targets of the wrong sizes, or incorrect parameters for trailing stops, can ruin a trading system, making it perform significantly worse.
Finally, although there is some interaction between the entry method and the behavior of the exit strategy, we discovered that there was also much similarity across entry methods in the behavior of the exits.