Home  | Courses  | Products  |  Order On-Line|  Contact Us

IITM, Inc.

Feature Article :

Importance of Exits: Part One 
By Chuck LeBeau

The outcome of every trade is dependent on the exit. If we enter in a timely fashion and then exit poorly, the trade is likely to be a loss. If our entry happens to be poor but our exit is good we might still salvage a profit. The exits, not the entries, determine the outcome of our trades. This lesson about exits is easily demonstrated. Take any entry strategy and begin combining it with different exit strategies. You will quickly see that we can change the results dramatically by making only minor adjustments to the exits. In fact it becomes nearly impossible to tell if an entry is any good because the results are so exit dependent. Bad exits can make a good entry look bad and good exits can make a bad entry look good.

When testing the validity of an entry method it is best to begin by simply exiting the trades after a number of bars. If you do anything more creative than this simple exit you will find that you are really testing your exits, not your entries. If you change the exits while attempting to test an entry strategy the results will vary so much depending on the exits selected that you will find that you can not make any valid assumptions about the reliability of the entry. When combined with the right exit the entry strategy looks great. When combined with the wrong exit the same entry looks terrible.

The purpose of an entry is to get the trade started in the right direction. To test the effectiveness of an entry we simply measure what percentage of the time it gets our trade started in the right direction. For example if we have entry "A" that has 60% winning trades after five days it is better than an entry "B" that has only 45% winners after five days.

You will notice that we made no comparison of risk or profitability in picking the best entry. What if entry "A" lost money and entry "B" made money? Is entry "A" still better? The answer is "Yes" because the purpose of an entry is merely to get the trade started in the right direction. After that everything else is dependent on the exits. Entry "B" just happened to make more money because of the particular exit we selected for the test. We can easily adjust our exits and we will find that entry "A" will consistently make more money than entry "B" because it gets the trades started in the right direction more often. To maximize our profit we need to combine the right entry with the right exit.

In our book, Computer Analysis of the Futures Market, we tell an amusing anecdote about a trader who seemed a bit loony because he used a Coke bottle with a broken radio antennae sticking out of it to receive trading advice from other planets. This advice, like most trading advice, was only related to the entries. When the voice from the Coke bottle told him to enter a trade he would come back to my desk and want to put the trade on right away saying something like: "They are buying soy beans on Mars, buy some beans for me".

The other traders sitting around the board room would overhear these frantic orders and became quite interested in this strange trading advice. Naturally they were quick to make fun of the trader when he was losing but they didn't have much to say when he was winning. The trader with the Coke bottle eventually learned that to avoid ridicule he had to take his losses quickly and hold on to his winners as long as possible. His trading steadily improved and he wound up being a surprisingly good trader. Obviously, his reliance on trading advice from other planets had nothing to do with his success. His entries were no better or worse than random but he had learned to be very good at his exits.

We should do the same.

About the Author: Chuck LeBeau  is the co-author of Computer Analysis of the Futures Market, and the former co-editor of Technical Traders Bulletin. Chuck is the featured speaker at IITM's upcoming How to Develop a Winning Trading System That Fits You three-day workshop in Phoenix, January 2004. Chuck has 27 years experience in the markets and is widely known for his specialized knowledge of technical analysis. He also develops trading systems and currently runs a website devoted to trading topics; www.traderclub.com. This article is under  Bulletins  from the "forum" section of Chuck's informative site.   

 Course1

Peak Performance Trading 101  

Learn 15 ways to develop rock-solid discipline in your trading. Discipline really means controlling your mental state. Unfortunately, most people allow their mental state to control them. In contrast, real winners maintain discipline that allows them to charge ahead of others in the field. If you play in a zero-sum trading game, like futures, you need to know every trick. These are the real secrets that separate successful traders and investors from the average person. 

Advanced Peak Performance Trading 202 

Re-invent yourself as a trader or investor. We identified a minimum of eleven levels at which the trading game is played.  Each level has its own set of rules and tends to superimpose those rules (at least for those who are unaware) on the levels below it.  Most people reading this are probably playing at one of the bottom three levels.  As a result, there are many rules superimposed upon you that you unconsciously obey.  But you don’t have to do that – especially once you are aware of the game and how it is played. 

Listening in....

Excerpts from Dr. Tharp's Discussion Forum. 

Happy New Year! 
Author: Ed 
Date: 01-01-04 15:14

Hi Van,

For the past two years, I have been working on your Peak Performance Home Study and System Development Courses. The changes that I experienced have been beyond what I could imagine.

For 15 years, I always went boom and bust in my personal trading accounts. I am not stupid, but I kept replaying my personal life dramas out in the stock and futures markets.

With the support of you and close friends, I now make commitments I can keep. I dedicate myself to get what I really want. I focus on what is right for me. I do not listen to the idle noise and chatter around me. I take risk levels that I feel good with.

I made a commitment to start my hedge fund now, and I didn't think I could do it until three years later - maybe even never! It feels good to start now and I look forward to each day as it comes~

You are one of the people that have changed my life, and I see that 2004 is a prosperous year for both of us!

Edward

-------

Author: Kevin T. 
Date: 01-01-04 20:34

Edward,

I am so appreciative of your post, as I am working my way through the PP course. I look forward to achieving the level of success that I know I can reach with my trading.

Reading the stories of others that have been down the path ahead of me, is a motivating force.

Best regards,

Kevin


Reply To This Message 

-------

Author: Van Tharp 
Date: 01-02-04 11:28

Thank you, Edward. Finding people like you and really helping them is what really motivates me in life. And that's why I do this and only trade part time. I could never give up the helping people part of it.

Thank you for your comments. We're always here to help.

Van 

Read the full, unedited thread  by clicking here. Van K. Tharp and traders, investors and wealth builders around the world connect on this site, share ideas and learn from each other.

Course2

How To Develop a Winning Trading System That Fits You Three Day Workshop

Learn about this three day workshop!

A critical task of system development is developing sound objectives. Jack Schwager, after writing two Market Wizard books, concluded that the most important characteristic of the top traders and investors he interviewed was that they had adopted a trading system to fit them. But to develop a system that fits you, you need to really think about what you want--what are your objectives. It’s not a trivial task. There are at least 30 questions you need to address when you develop a trading system. You will learn what they are and be required to focus on them during the course.

Trading Tips:

Peak Performance Trading Tips

Trading and Christmas Presents
by  D. R. Barton, Jr. 

We love to expect, and when expectation is either disappointed or gratified, we want to be again expecting. --Samuel Johnson

I learned some valuable lessons all over again this Christmas season.  And whether you celebrate Jesus’ birthday with vigor (like the Barton family) or follow some other tradition during this season, you’ll be familiar with the psychology of “gift getting”.

At one of the Christmas messages at our church, Pastor Bo (his real name) really uncovered the mystery of “gift getting” for me.  And almost simultaneously, his insights revealed the essence of one the biggest trading problems that I believe we all face.  But more on that later; for now, let’s focus on the gifts. 

Everyone loves getting presents.  Sure, we all know some old curmudgeon who has become a jaded gift-getter.  (Dickens didn’t invent Scrooge out of thin air.) But I mean deep down inside where the part of us that’s still a little kid just drools about getting a gift.  Pastor Bo (I’m serious.  That’s his real name.) unlocked the secret to our delight with presents.  He said that when we get a gift - the wrapped kind - it is pregnant with possibility.  It could be ANYTHING.  It puts us in that greatest of all mental states - HOPE.  As Samuel Johnson said in the opening quote, “We love to expect.”  While that present is still mysterious and wrapped we are full of hope – the hope that it’s just what we want.  The hope that it will thrill us.  The hope that unexpected joy (or greatly anticipated joy) is just around the corner. 

And then we open the package.  The thing that only an instant ago was filled with unlimited possibility turns into a finite reality.  ANYTHING becomes something.  HOPE becomes certainty.  Expecting becomes knowing.  The finest glass slipper, the most spectacular magic wand, or what was once our heart’s desire can’t hope but degrade into a disappointment in that brutal transition.  I have seen this in my children.  I have witnessed it in adults.  And I have felt it in my very soul.  Perhaps Christmas is much less about gift getting and much more about an annual rekindling of hope.  For me, it’s about a hope that lies in a manger.  For you, it may be a hope for renewed ties with family and friends.

So what do we do with the recurring theme where our exciting “ANYTHINGS” keep getting turned into mundane “somethings” every time we take off the wrapping paper?  Van has helped me understand that I am responsible for what I feel when I open up the present.  I choose joy over disappointment and contentment over yearning for instant gratification.

D. R. Barton, Jr. is a lead instructor for IITM courses. He is the Chief Operating Officer and Risk Manager for the Directional Research and Trading hedge fund group. D. R. has been actively involved in trading, researching and teaching in the markets since 1986. In 1999. D. R. has created extensive and innovative new training products and taught extensively in many investment areas including intra-day trading, swing trading, and cutting edge risk management techniques.

His writing credits include: Safe Strategies for Financial Freedom by Van K. Tharp, D. R. Barton, Jr. and Steve Sjuggerud and cover articles for the trade newsletter Market Mastery where he also serves on the editorial advisory board. In addition, D. R. writes a stock screening newsletter for traders and investors called The 10-Minute Trader.

R-e-m-o-v-e me

iitm.com does not support spamming in any way, shape or form. This is a subscription based newsletter. If you no longer wish to subscribe, Click Here. 
Contact us:  [email protected]

Quote of the Week:

"Knowledge of the self is the mother of all knowledge. So it is incumbent on me to know my self, to know it completely, to know its minutiae, its characteristics, its subtleties, and its very atoms."
-Kahlil Gibran, 

Share this newsletter with a friend!

Dr. Van Tharp's Trading Discussion Forum
  www.mastermindforum.com

Ask questions, share ideas, information and feedback with Dr. Tharp and other like-minded traders and investors. 

Share this newsletter with a friend!