Sometimes It’s Time to Exit (Step 16)

Sept. 23, 2020

We recently started a journey to beat the market. We want a system that will vastly outperform the market over time and build that system step-by-step so anyone can follow along. Feel free to ask questions as we go. 

To review, here’s what we’ve done with our Breakout system so far:

1. We introduced the greatest trading methodology of all time;
2. We talked about how no one wants to trade this methodology;
3. We learned the details of the system.
4. We put our systems on Futures.
5. We touched on The Great Debate (Everything or Trend-Only).
6. We looked at breakouts on individual stocks.
7. We looked at our system in Forex Daily charts.
8. We looked at matching our system with the instrument.
9. We examined if breakouts work better on smaller timeframes.
10. We used common sense and put a break-even in.
11. We tried a break-even buffer.
12. We examined variable trade size.
13. We made an Fx portfolio.
14. We also made Futures and stock portfolios.
15. We discussed why trading breakouts is impossible.

When you examine publicly-disclosed strategies from great traders, you find something unexpected.

Timed exits.

Exits that get out after a certain amount of time, no matter what.

I was surprised to see how many good traders use this “trick” in their strategies and was also surprised how many backtests improve by using timed exits.

But I’m reluctant to use this trick on a breakout-type of strategy.

Why?

Because hard-core trend followers might burn my house down.

The whole point of a breakout strategy is to let it break out. And then let it run as far and as long as possible.

Putting a timed-exit on a breakout strategy goes against everything that every smart person knows about how to trade breakouts.

I’ll do it anyway, though, if only to prove the wisdom of hardcore trend following dogma.

To test it out, we’ll return to one of our Forex pairs, the GBPJPY. We’re on a Daily chart.

On one test, we’ll leave our strategy as-is. On the other test, we’ll put a restrictive 10-bar timed exit on it. That means that all trades are exited after 10 bars. Period.

Surely, it won’t work.

Here are the results from 2012-2020:

If you can’t see, here’s what happened.

The timed exit produced more profit and had less drawdown.

Using a timed exit on a breakout strategy is (gasp) better than “letting your profits run.”

Who knew?

In our next email, we’ll look at one last possible change to our strategy.

Talk to you soon.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.