Why Use Multiple Exits? The member questioned whether the exits were working properly and wondered about the logic of having so many different exit strategies operating within one system. I sent the member a brief reply and promised to write a Bulletin that explained our philosophy and procedures about the use of multiple exits in more detail. When we develop trading systems the entry is usually just a few lines of code but the exit strategies and coding are often very complex. We may have a system with only one very simple entry method and that system may have a dozen or more exit strategies. The reason for devoting so much effort and attention to achieving accurate exits is that over our many years of trading we have come to appreciate both the importance and the difficulty of accurate exits.

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Stock traders on the other hand have not been faced with this problem and may have become complacent about their exits. With the increasing volatility evidenced in the stock market recently we think that stock traders will benefit greatly from an increased awareness of the importance of good exit timing.

Those who have read our book and followed our work over the years will recall that we have long been outspoken advocates of the importance of good exits. In our opinion exits are much more important than entries yet the majority of new traders spend most of their time seeking the ideal entry strategy as if the entry determined the outcome of the trade.

This assumption might be true for a buy and hold investment but this is definitely not the case for traders. System traders in particular will find entries have very little influence in determining the result of a system. In the System Building workshops that I teach with Dr.

Van Tharp, we play an exit game where everyone enters a series of trades at the same price and then each student implements their own exit strategy as new prices are reported to the group. After about ten quick trials of this game the results typically range from one extreme to the other.

A few traders make a lot of money; a few lose a lot of money and most fall somewhere in between. It is rare for any two players to have the same results and the point of this simple exercise is to illustrate the effect of exits on our trading results.

In this game everyone has identical entries yet the final performance of the simulated trading ranges from large losses to large profits. The same is true in actual trading. Exits determine the outcome of our trading far more than anyone realizes. In fact our research shows that exits have more impact on the results of a system than any other factor, including money management position sizing.

Not even the best money management strategy can make a losing system into a winner but a minor change in the exit strategy can work miracles. We first observed the impact of exits years ago when attempting our research of popular indicators we were testing as entries.

We found that even a minor variation of the exit strategy would drastically affect the number of trades, the size of the winners and losers, the percentage of winners, the size of the drawdown and the total profitability.

Although we set out to test entries, we quickly discovered that the performance data was entirely dependent on the exits we used and the entries had little if anything to do with the results. To make our research more meaningful we eventually began isolating, as best we could, the testing of entries and exits. We now evaluate our entries based solely on the percentage of winning trades they produce when exiting after a specified number of bars.

This method of testing entries evolves from our conclusion that the primary purpose of entry timing is to get the trade started in the right direction as accurately as possible. Everything that happens after the entry is determined by our exit strategies.

Ideally we want our entries to accomplish only one purpose and that is to get our new trades started in the right direction as quickly as possible. This function is easy to measure and the higher the winning percentage after a few bars in the trade, the better the entry. But how do we measure the efficiency of our exits? How can we tell if one exit is better than another? What is a good exit? What is a bad exit? Which is better: exit A or exit B?

To better quantify the relative merit of various exits we created the Exit Efficiency Ratio and several years ago we contributed an article on this topic to Futures magazine. Here is our original version of the Exit Efficiency Ratio. You need to start by keeping or creating a record of your winning trades. You must also keep a record of the total number of bars in the trade from entry to exit.

The next step is to go back and look at our entry point and 24 bars of data after our entry. Our theoretical holding period is now twice the actual holding period. We then use perfect hindsight to identify the best possible exit point within this theoretical holding period.

The Exit Efficiency Ratio is then calculated by dividing the actual gross profit by the theoretical gross profit. The Portfolio Maximizer formula measures only the efficiency during the actual holding period. I suspect that this modification is for practical reasons because the trade by trade data used for the Portfolio Maximizer calculations would not include any data that was outside the time period of the actual trade.

When calculating the best theoretical exit point, the doubling of the holding period is critical to evaluating the exit fairly because most traders are inclined to err on the side of exiting their profitable trades much too soon. By extending the theoretical holding period beyond the actual exit bar we can see if this was the case. If we only measured the bars in the actual trade our ideal exit point might have been on the 12th bar where we closed out our trade just as we were reaching a new peak.

The tendency of any calculation based only on the bars during the trade would be to reward us for exits prior to the peak and to penalize us for exits that were more profitable but were implemented after the peak. By doubling the holding period in our theoretical calculation of the ideal exit point we can easily see if we closed out any of our trades too soon.

Unfortunately the Exit Efficiency Ratio can only be applied to profitable trades and applying it to your trading and research will require some additional effort and record keeping. Whether you use this valuable calculation or not, we suggest that emphasizing and improving your exits is the quickest and most effective method to improve the performance of your system.


Charles (Chuck) LeBeau Videos

Make sure you take advantage of this special offer since it will only be available for a few days. With this power applied to your trades, you will quickly: Isolate trends to find the best trades in any market, Confirm the strength of the trend to precisely calculate your risk and size your trade accordingly, Determine the range that stock or market has been trading to measure it against other trades, Set a stop that considers your risk tolerance, the volatility of that market and locks in the greatest upside. These are approaches that have been applied by traders for years and have proven to generate large benefit. What you get in this DVD course will allow you to feel confident that your trades are locked in with maximum profit and your targeted exits.


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