This third part of my review of trades took a bit longer than expected to be completed. In case you are reading this review for the first ti...

Review of My Analysis in 1H 2016 Part Three: Exits

This third part of my review of trades took a bit longer than expected to be completed. In case you are reading this review for the first time, you can read the first two parts of my review here:

This part of the review will be about exits. Exits are always tricky issues since you will not know what will happen after you exit a trade. Exiting too early you would be wishing you held on to the trade for bigger gains. Exiting too late you would be wishing that you have locked in your profits earlier. 

Once again, I will be taking reference from the super laws of selling technical risk from Jesse Stine's IBSS. There are a total of sixteen super laws of selling technical risk mentioned in the book. I will be focusing on the five laws that resonate most with me, more suited for shorter holding period and are less subjective when implementing. The five laws that I will be taking reference from are:

1) Sell time and large deviation from 10 week moving average or magic line
2) Sell a flattening or declining magic line after a long advance
3) Sell large price ranges
4) Sell at your stop loss
5) Sell upper bollinger band

To make the rules non-ambiguous, I will modify the rules to the following:
1) Sell 8 weeks (inclusive) if price does not touch the magic line
2) Sell at the third week of non-rising magic line
3) Sell when price closes below the magic line
4) Sell when the range (high-low of the week) is more than twice the average true range
5) Sell when price touches 8% below buy price
6) Sell when price closes below the bollinger band having previously closed above it

To further reduce ambiguity, the magic line is defined as 10wMA by default. Only when a buying opportunity is spotted when price retraces to the 30wMA, the 30wMA will be defined as the magic line.


The table below summarizes the result based on different exit strategies. As seen from the table below, there are no obvious differences between the strategies except for rule number 1 that significantly under-performed.

Counting the number of trades that outperform the simple strategy of buying and holding (till 24 June), the conclusion looks different. Rule number 1 produced more trades that out-performed than under-performed the simple strategy. Rule number 3 of using a stop loss by design will under-perform since most of the trades in the sample are winning trades. Rule number 4 was least utilised due to the strict condition, but tend to outperform the simple strategy when utilised.

With the above comparisons, we can only rule out rule number 1 and 5. Rule number 1 will not enable me to capture the long runs that some of the superstocks had. Rule 5 would not be necessary since the other rules will have some stop loss properties and yet provide better returns than rule number 5.

The large range rule should be adopted since it is most likely to outperform the simple strategy. And by selling on large range, we are either selling on climax or selling a fundamental collapse. The bollinger strategy should be used because it does a great job at preventing losses while maintaining a decent rate of return. Among the 16 stocks, merely 2 resulted in small losses. It even turned the other 3 losses that occurred with the simple strategy into a profit.

That leaves us with rule 2 and 3, which are two very similar rules by design. Rule number 2 does give trades a bit more space to run. The downside will be greater average losses. While the maximum loss under rule number 3 is 7%, there were 3 trades under rule 2 resulting in losses greater than 7%. As such, I will prefer rule 3 despite a 2% lower return.

Hypothetical Trade

From the above comparison, I have chosen rule 3, 5 and 6 to be my exit strategies. My selected entry based on part 2 of the review will be entering at the time of post. The table below will summarize the outcome of the trades that I would have taken.

The trades returned an average of 21%, lower than the average of each strategies applied separately. There was a number of trades that was stopped out by rule 5 - large range at the same time as either of the strategy, but was not shown in the table.

While conducting this simulation, I noticed that when a trade is entered above the upper bollinger band, rule number 6 gives very room for the trade to run. Therefore I decided to remove rule number 6 as an option when a trade is entered above the upper bollinger band. The updated results are shown below.

The result is encouraging as the average return of the trade increased by 4% to 25%, similar to the returns of the individual strategies.


In the final part of the review, I will be looking at the effects of re-entering. If the fundamentals of the company is still strong, being stopped out by the above strategies should not prevent us from re-entering the trade.

The two scenarios that I will be testing are:
1) After stopped out by rule 3 (close below the magic line), re-enter if price closes above the magic line the following week.
2) After stopped out by rule 5 (large range), re-enter at the touch of the magic line.

As it turns out, there were only three re-entry opportunities. And these trades will not have any impact on my trading performance as their returns were cancelled out.

This implied that my analysis will be good for one-time use only, which is not too bad considering an average return of 25% per trade. It will also save me much time as I can stop monitoring the stock after I exited a trade.

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