V.16:7 (324-328): Barrier Stops And Trendlines by J. Katz, Ph.D., and D. McCormick

Barrier Stops And 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.