I have written this article as a follow-up to my previous article on trading shares. The share trading strategy used a 200-day simple moving average as a trend filter, only taking long positions during an uptrend and only taking short positions during a downtrend. Long positions were taken when the price closed lower than it had ever closed in the previous ten days and short positions were taken when the price closed higher than it had ever closed in the previous ten days. The system's exit strategy closed long trades on the first new ten day closing price high after forty days and closed short trades on a new ten day closing price low after forty days.
I am going to compare waiting forty days for the first new ten day closing price high or low with simply exiting on the first new ten day closing price high or low. And compare both these exit strategies with a simple forty day time-based exit. I will compare the results of the three indices I tested in my previous article. The tests will be done on the closing price data from the beginning of the year 2004 to July 2011, 7 ½ years. The results are as follows –
Share/Index
Exiting on the first 10-day high or low closing price after 40 days
Exiting on the first 10-day high or low closing price
Exiting using a 40-day time-based exit
FTSE 100
29 trades, 68.96% are winners. Points won to points lost ratio is 1.904 to 1
61 trades, 70.49% are winners. Points won to points lost ratio is 1.491 to 1
33 trades, 60.60% are winners. Points won to points lost ratio is 1.897 to 1
S&P 500
28 trades, 67.86% are winners. Points won to points lost ratio is 2.874 to 1
54 trades, 70.37% of trades are winners. Points won to points lost ratio is 2.250 to 1
32 trades, 56.25% of trades are winners. Points won to points lost ratio is 1.803 to 1
Dow Jones
29 trades, 55.56% are winners. Points won to points lost ratio is 1.542 to 1
51 trades, 62.74% of trades are winners. Points won to points lost ratio is 1.376 to 1
34 trades, 55.88% of trades are winners. Points won to points lost ratio is 1.701 to 1
As a quick glance of the table will show, not giving the trade time to work and taking the first favourable price significantly reduces the winnings, although it does provide more trading opportunities. And while waiting for a favourable price does provide an edge, waiting for reasonable amount of time (in this case forty days) is even more effective than a favourable price exit, and taking a favourable price after a reasonable amount of time has passed is even more effective an exit strategy still.
