Today I just want to touch briefly on the exit parameters for the “2 Days In Chop” systems that I discussed yesterday. The exit strategy is basically a time stop married with a “first profitable close” exit. For many traders, a “first profitable close” exit may seem like nothing more than a ploy to inflate the winning % of the system and not an appropriate exit technique to put into practice.
Sometimes this is true. In other cases though, the 1st Profitable Close exit is appropriate and effective. “2 Days In Chop” is one of those cases. Recall the premise of the system was based on taking advantage of the extremely choppy market conditions that had been identified. It’s those choppy conditions that make the 1st Profitable Close strategy viable.
When conditions are especially choppy and the market is constantly swinging back and forth, the expectation is for that chop to persist. This would suggest a move in the direction of the trade is more likely to be reversed than to follow through. So with a system like “2 Days in Chop”, the expectation flips as soon as the trade becomes profitable. Since a reversal is more likely than continued follow through the correct play is to take the quick profit.
Obviously an exit strategy like this only works well when trading a reversal / mean reverting system in a choppy environment. In a different environment, or if trading a breakout system, an exit strategy that looks for quick profits would be a disaster.
Other techniques that work well when trading overbought/oversold conditions would include using a short term oscillator and waiting for that oscillator to revert back to a neutral state, or using a short-term moving average (such as a 5-day) and then exiting the trade on a cross of the moving average.