There are many avenues a consumer can use to obtain a loan, each with both advantages and disadvantages. As far as the pay day loan is concerned, they are available both online and in traditional brick and mortar stores, both of which are easily found. While the gist of the loan is the same regardless of where you go, there are inherent differences in each method.
Most brick and mortar payday loan stores take your information on the spot and when you are approved, the money is given to you while you are there. The only drawback is that you may have to wait in line, whereas with online loans, this is not the case. Many people look down on the payday loan, but the fact is that these companies provide an invaluable service and provide many jobs in the community and help people out in many ways by offering many other financial services as well as the payday loans themselves.
Most often, people use the money from their payday loans for everyday expenses, but more and more savvy consumers are using this money for investments for their future. Money market accounts, CD’s, and penny stocks are just a few of the possible investment opportunities available to those who wish to start saving for the future. Payday loans can truly open up an all new dynamic for your financial future.
Friday, October 12, 2007
Tuesday, May 01, 2007
Trading with Strategy
Trading successfully is by no means a simple matter. It requires time, market knowledge and market understanding and a large amount of self restraint. ACM does not manage accounts, nor does it give market advice, that is the job of money managers and introducing brokers. As market professionals, we can however point the novice in the right direction and indicate what are correct trading tactics and considerations and what is total nonsense.
Anyone who says you can consistently make money in foreign exchange markets is being untruthful. Foreign exchange by nature, is a volatile market. The practice of trading it by way of margin increases that volatility exponentially. We are therefore talking about a very 'fast market' which is naturally inconsistent. Following that precept, it is logical to say that in order to make a successful trade, a trader has to take into account technical and fundamental data and make an informed decision based on his perception of market sentiment and market expectation. Timing a trade correctly is probably the most important variable in trading successfully but invariably there will be times where a traders' timing will be off. Don't expect to generate returns on every trade.
Let's enumerate what a trader needs to do in order to put the best chances for profitable trades on his side:
Trade with money you can afford to lose:
Trading fx markets is speculative and can result in loss, it is also exciting, exhilarating and can be addictive. The more you are 'involved with your money' the harder it is to make a clear-headed decision. Money you have earned is precious, but money you need to survive should never be traded.
Identify the state of the market:
What is the market doing? Is it trending upwards, downwards, is it in a trading range. Is the trend strong or weak, did it begin long ago or does it look like a new trend that's forming. Getting a clear picture of the market situation is laying the groundwork for a successful trade.
Determine what time frame you're trading on:
Many traders get in the market without thinking when they would like to get out, after all the goal is to make money. This is true but when trading, one must extrapolate in his mind's eye the movement that one expects to happen. Within this extrapolation, resides a price evolution during a certain period of time. Attached to this is the idea of exit price. The importance of this is to mentally put your trade in perspective and although it is clearly impossible to know exactly when you will exit the market, it is important to define from the outset if you'll be 'scalping' (trying to get a few points off the market) trading intra-day, or going longer term. This will also determine what chart period you're looking at. If you trade many times a day, there's no point basing your technical analysis on a daily graph, you'll probably want to analyse 30 minute or hour graphs. Additionally it is important to know the different time periods when various financial centers enter and exit the market as this creates more or less volatility and liquidity and can influence market movements.
Time your trade:
You can be right about a potential market movement but be too early or too late when you enter the trade. Timing considerations are twofold, an expected market figure like CPI, retail sales or a federal reserve decision can consolidate a movement that's already underway. Timing your move means knowing what's expected and taking into account all considerations before trading. Technical analysis can help you identify when and at what price a move may occur. We will look at technical analysis in more detail later.
If in doubt, stay out:
If you're unsure about a trade and find you're hesitating, stay on the sidelines.
Trade logical transaction sizes:
Margin trading allows the fx trader a very large amount of leverage, trading at full margin capacity (in ACM's case 1% or 0.5%) can make for some very large profits or losses on an account. Scaling your trades so that you may re-enter the market or make transactions on other currencies is generally wiser. In short, don't trade amounts that can potentially wipe you out and don't put all your eggs in one basket. ACM offers the same rates regardless of transaction sizes so a customer has nothing to lose by starting small.
Gauge market sentiment:
Market sentiment is what most of the market is perceived to be feeling about the market and therefore what it is doing or will do. This is basically about trend. You may have heard the term 'the trend is your friend', this basically means that if you're in the right direction with a strong trend you will make successful trades. This of course is very simplistic, a trend is capable of reversal at any time. Technical and fundamental data can indicate however if the trend has begun long ago and if it is strong or weak.
Market expectation:
Market expectation relates to what most people are expecting as far as upcoming news is concerned. If people are expecting an interest rate to rise and it does, then there usually will not be much of a movement because the information will already have been 'discounted' by the market, alternatively if the adverse happens, markets will usually react violently.
Use what other traders use:
In a perfect world, every trader would be looking at a 14 day RSI and making trading decisions based on that. If that was the case, when RSI would go under the 30 level, everyone would buy and by consequence the price would rise. Needless to say, the world is not perfect and not all market participants follow the same technical indicators, draw the same trendlines and identify the same support & resistance levels. The great diversity of opinions and techniques used translates directly into price diversity. Traders however have a tendency to use a limited variety of technical tools. The most common are 9 and 14 day RSI, obvious trendlines and support levels, fibonnacci retracement, MACD and 9, 20 & 40 day exponential moving averages. The closer you get to what most traders are looking at, the more precise your estimations will be. The reason for this is simple arithmetic, larger numbers of buyers than sellers at a certain price will move the market up from that price and vice-versa.
by Nicholas H. Bang
ac-markets.com
Anyone who says you can consistently make money in foreign exchange markets is being untruthful. Foreign exchange by nature, is a volatile market. The practice of trading it by way of margin increases that volatility exponentially. We are therefore talking about a very 'fast market' which is naturally inconsistent. Following that precept, it is logical to say that in order to make a successful trade, a trader has to take into account technical and fundamental data and make an informed decision based on his perception of market sentiment and market expectation. Timing a trade correctly is probably the most important variable in trading successfully but invariably there will be times where a traders' timing will be off. Don't expect to generate returns on every trade.
Let's enumerate what a trader needs to do in order to put the best chances for profitable trades on his side:
Trade with money you can afford to lose:
Trading fx markets is speculative and can result in loss, it is also exciting, exhilarating and can be addictive. The more you are 'involved with your money' the harder it is to make a clear-headed decision. Money you have earned is precious, but money you need to survive should never be traded.
Identify the state of the market:
What is the market doing? Is it trending upwards, downwards, is it in a trading range. Is the trend strong or weak, did it begin long ago or does it look like a new trend that's forming. Getting a clear picture of the market situation is laying the groundwork for a successful trade.
Determine what time frame you're trading on:
Many traders get in the market without thinking when they would like to get out, after all the goal is to make money. This is true but when trading, one must extrapolate in his mind's eye the movement that one expects to happen. Within this extrapolation, resides a price evolution during a certain period of time. Attached to this is the idea of exit price. The importance of this is to mentally put your trade in perspective and although it is clearly impossible to know exactly when you will exit the market, it is important to define from the outset if you'll be 'scalping' (trying to get a few points off the market) trading intra-day, or going longer term. This will also determine what chart period you're looking at. If you trade many times a day, there's no point basing your technical analysis on a daily graph, you'll probably want to analyse 30 minute or hour graphs. Additionally it is important to know the different time periods when various financial centers enter and exit the market as this creates more or less volatility and liquidity and can influence market movements.
Time your trade:
You can be right about a potential market movement but be too early or too late when you enter the trade. Timing considerations are twofold, an expected market figure like CPI, retail sales or a federal reserve decision can consolidate a movement that's already underway. Timing your move means knowing what's expected and taking into account all considerations before trading. Technical analysis can help you identify when and at what price a move may occur. We will look at technical analysis in more detail later.
If in doubt, stay out:
If you're unsure about a trade and find you're hesitating, stay on the sidelines.
Trade logical transaction sizes:
Margin trading allows the fx trader a very large amount of leverage, trading at full margin capacity (in ACM's case 1% or 0.5%) can make for some very large profits or losses on an account. Scaling your trades so that you may re-enter the market or make transactions on other currencies is generally wiser. In short, don't trade amounts that can potentially wipe you out and don't put all your eggs in one basket. ACM offers the same rates regardless of transaction sizes so a customer has nothing to lose by starting small.
Gauge market sentiment:
Market sentiment is what most of the market is perceived to be feeling about the market and therefore what it is doing or will do. This is basically about trend. You may have heard the term 'the trend is your friend', this basically means that if you're in the right direction with a strong trend you will make successful trades. This of course is very simplistic, a trend is capable of reversal at any time. Technical and fundamental data can indicate however if the trend has begun long ago and if it is strong or weak.
Market expectation:
Market expectation relates to what most people are expecting as far as upcoming news is concerned. If people are expecting an interest rate to rise and it does, then there usually will not be much of a movement because the information will already have been 'discounted' by the market, alternatively if the adverse happens, markets will usually react violently.
Use what other traders use:
In a perfect world, every trader would be looking at a 14 day RSI and making trading decisions based on that. If that was the case, when RSI would go under the 30 level, everyone would buy and by consequence the price would rise. Needless to say, the world is not perfect and not all market participants follow the same technical indicators, draw the same trendlines and identify the same support & resistance levels. The great diversity of opinions and techniques used translates directly into price diversity. Traders however have a tendency to use a limited variety of technical tools. The most common are 9 and 14 day RSI, obvious trendlines and support levels, fibonnacci retracement, MACD and 9, 20 & 40 day exponential moving averages. The closer you get to what most traders are looking at, the more precise your estimations will be. The reason for this is simple arithmetic, larger numbers of buyers than sellers at a certain price will move the market up from that price and vice-versa.
by Nicholas H. Bang
ac-markets.com
Wednesday, March 14, 2007
Online Payment Services Provider (PSP)
Increasingly organizations are looking for ways to collect payment for goods and services online. To accept Credit Card Payments online you will need to obtain an Internet Merchant Account and an Online Payment Services Provider (PSP).
Online payments can be fast convenient way for your users to pay for goods and services over the Internet using their credit card, debit card or other methods. For example:
Online payments can be fast convenient way for your users to pay for goods and services over the Internet using their credit card, debit card or other methods. For example:
- You may wish to accept payment for events such as conferences online
- You may wish to fundraise via your website
- You may have publications or other merchandise to sell
Advantages of collecting payments online include:
- Convenience
- Immediacy
- Potential to reach a wider audience and hence more "customers"
UK Payment Service Providers provide software that allows card details to be processed, and acts as a gateway between your e-commerce system and the banks. The UK PSP takes payment details from your customer, checks the details with the appropriate bank, and sends the result of the check back to your system. Authorization or rejection of the transaction is completed within seconds, so you know whether or not to proceed with your customer’s order. The PSP also takes care of the final settlement of the transaction (i.e. when the money is paid into your merchant account).
Here is a UK Payment Service Provider: Axiar PSP
Wednesday, February 28, 2007
Frequency of Trading is Critical
When building or evaluating trading systems the many benefits of systems that trade very frequently are often overlooked. A system that trades frequently has many advantages over less active systems that appear to be more desirable because they have better performance ratios.
If a strategy is profitable the more it trades the more money we should make. I apologize for stating what should be obvious but you would be surprised at how often I hear discussions about selecting systems with the highest level of "expectancy" or highest "profit factor" without relating these measurements to the system's trading frequency. Simply stated, our goal should be to show the most profit with the least amount of risk and trading frequency plays a critical role in maximizing profitability and controlling our risk.
Trading frequency represents opportunity for profit. The more opportunities we can find the more profit we should expect. For example, a strategy that has a very high profit factor of 4 (profit factor is total profits divided by total losses) may not produce as much profit as a more active system that has a profit factor of only 2. Since the strategy with the lower profit factor is profitable and it has many more opportunities it may easily produce more total profit than the system with the much higher profit factor.
Active systems should give us a higher confidence level when analyzing our test data. In addition to increasing total profits, a very active system gives us much more data to analyze when doing our preliminary research. If we have a long-term trend-following strategy that produces only 50 trades over five years of data our positive results may not be nearly as reliable as the results from analyzing a more active strategy that produced 1000 trades over the same data sample. I would be willing to bet that the system with the larger sample of trades is more likely to produce profitable results in the future because our level of confidence must relate to the number of samples in our testing.
Active systems should produce more reliable results and a smoother equity curve. If we flip a coin only ten times our odds of having 50% heads and 50% tails are not very good. However if we flip the coin one thousand times we are likely to come much closer to obtaining 50% heads and 50% tails. The same logic applies to our real-time trading. If we have a large sample of real trades then our results should come closer to our expectations than if we only have a one or two trades. The active system will approach our expectations much quicker than the system that trades infrequently. If we have 50 or more trades per month with a good system we might reasonably expect to be profitable every month. However if we have a system that is only producing two or three trades per month then our monthly results will less predictable and inconsistent. The infrequent trading system might be expected to produce a profit every year but it would not be realistic to expect it to show a profit every month because the sample size in a month will be very small.
Here is a quick summary:
1. Active systems give bigger samples in testing which make the test results more reliable.
2. Active systems have more opportunity for profits and should produce more total profit over time.
3. Active systems should produce a smoother equity curve.
When setting your goals for a trading system you should give trading frequency a high priority even if it means that some of the usual performance measurements may suffer.
How to increase trading frequency:
1. Use quicker parameters for entries. Trading frequency can usually be increased in a system by using more sensitive (usually shorter) parameters for the indicators that determine the entries and exits.
2. Be aggressive when taking profits. Quicker exits that lock in profits will tend to increase the number of trades but may reduce the average profit per trade. That trade-off may prove to be worthwhile and may substantially increase the total profit over the long run.
3. Trade multiple markets. Diversification among markets should produce more trades and more consistent results.
4. Trade multiple systems. Adding more trading systems will increase the activity level. Use as many systems as you believe to be practical in terms of available capital and as many systems as you can accurately monitor.
5. Trade multiple time frames. A system that works well on daily charts may also produce positive results on hourly charts or weekly charts. Don't make the mistake of assuming that only one time frame must be used.
Here are a few final thoughts.
Drawdowns: I have found that adjusting a system to be more active will almost always increase the size of the drawdowns. However in many cases the larger drawdowns are simply the result of having a much larger sample size over the period being tested. If you perform a Monte Carlo simulation on a system that trades infrequently you will observe that larger drawdowns become more likely as the number of trades in the simulation increases. This means that your test data on the inactive system is showing an unrealistic drawdown that is probably lower than what you might expect to actually experience when trading that system over the long run. If you don't have a program to perform Monte Carlo simulations and you are analyzing a system that trades infrequently you should double the size of the historical drawdown to give you a more realistic idea of what to expect in real trading with a larger sample size.
Increased costs: Trading more often will increase your trading costs in terms of commissions and slippage. Be sure to factor in realistic costs when doing your testing. The idea of trading frequently is to make more money. At some point increased trading will begin to reduce your total profitability. You should know where that point of diminishing returns kicks in.
I'm not a mathematician but I think that system traders need a formula for comparing systems that includes the frequency of trading. (For example: Expectancy times frequency or Profit Factor times frequency.) Any other suggestions?
by Chuck LeBeau
If a strategy is profitable the more it trades the more money we should make. I apologize for stating what should be obvious but you would be surprised at how often I hear discussions about selecting systems with the highest level of "expectancy" or highest "profit factor" without relating these measurements to the system's trading frequency. Simply stated, our goal should be to show the most profit with the least amount of risk and trading frequency plays a critical role in maximizing profitability and controlling our risk.
Trading frequency represents opportunity for profit. The more opportunities we can find the more profit we should expect. For example, a strategy that has a very high profit factor of 4 (profit factor is total profits divided by total losses) may not produce as much profit as a more active system that has a profit factor of only 2. Since the strategy with the lower profit factor is profitable and it has many more opportunities it may easily produce more total profit than the system with the much higher profit factor.
Active systems should give us a higher confidence level when analyzing our test data. In addition to increasing total profits, a very active system gives us much more data to analyze when doing our preliminary research. If we have a long-term trend-following strategy that produces only 50 trades over five years of data our positive results may not be nearly as reliable as the results from analyzing a more active strategy that produced 1000 trades over the same data sample. I would be willing to bet that the system with the larger sample of trades is more likely to produce profitable results in the future because our level of confidence must relate to the number of samples in our testing.
Active systems should produce more reliable results and a smoother equity curve. If we flip a coin only ten times our odds of having 50% heads and 50% tails are not very good. However if we flip the coin one thousand times we are likely to come much closer to obtaining 50% heads and 50% tails. The same logic applies to our real-time trading. If we have a large sample of real trades then our results should come closer to our expectations than if we only have a one or two trades. The active system will approach our expectations much quicker than the system that trades infrequently. If we have 50 or more trades per month with a good system we might reasonably expect to be profitable every month. However if we have a system that is only producing two or three trades per month then our monthly results will less predictable and inconsistent. The infrequent trading system might be expected to produce a profit every year but it would not be realistic to expect it to show a profit every month because the sample size in a month will be very small.
Here is a quick summary:
1. Active systems give bigger samples in testing which make the test results more reliable.
2. Active systems have more opportunity for profits and should produce more total profit over time.
3. Active systems should produce a smoother equity curve.
When setting your goals for a trading system you should give trading frequency a high priority even if it means that some of the usual performance measurements may suffer.
How to increase trading frequency:
1. Use quicker parameters for entries. Trading frequency can usually be increased in a system by using more sensitive (usually shorter) parameters for the indicators that determine the entries and exits.
2. Be aggressive when taking profits. Quicker exits that lock in profits will tend to increase the number of trades but may reduce the average profit per trade. That trade-off may prove to be worthwhile and may substantially increase the total profit over the long run.
3. Trade multiple markets. Diversification among markets should produce more trades and more consistent results.
4. Trade multiple systems. Adding more trading systems will increase the activity level. Use as many systems as you believe to be practical in terms of available capital and as many systems as you can accurately monitor.
5. Trade multiple time frames. A system that works well on daily charts may also produce positive results on hourly charts or weekly charts. Don't make the mistake of assuming that only one time frame must be used.
Here are a few final thoughts.
Drawdowns: I have found that adjusting a system to be more active will almost always increase the size of the drawdowns. However in many cases the larger drawdowns are simply the result of having a much larger sample size over the period being tested. If you perform a Monte Carlo simulation on a system that trades infrequently you will observe that larger drawdowns become more likely as the number of trades in the simulation increases. This means that your test data on the inactive system is showing an unrealistic drawdown that is probably lower than what you might expect to actually experience when trading that system over the long run. If you don't have a program to perform Monte Carlo simulations and you are analyzing a system that trades infrequently you should double the size of the historical drawdown to give you a more realistic idea of what to expect in real trading with a larger sample size.
Increased costs: Trading more often will increase your trading costs in terms of commissions and slippage. Be sure to factor in realistic costs when doing your testing. The idea of trading frequently is to make more money. At some point increased trading will begin to reduce your total profitability. You should know where that point of diminishing returns kicks in.
I'm not a mathematician but I think that system traders need a formula for comparing systems that includes the frequency of trading. (For example: Expectancy times frequency or Profit Factor times frequency.) Any other suggestions?
by Chuck LeBeau
Friday, January 19, 2007
Trailing Stops
Now that we have taken the necessary precautions to avoid catastrophic losses by using disciplined money management stops, it is appropriate to concentrate on strategies that are designed to accumulate and retain profits in the market. When properly implemented these strategies are intended to accomplish two important goals in trade management: they should allow profits to run, while at the same time they should protect open trade profits.
While their application is extremely wide, we do not believe that trailing stops are appropriate in all trading circumstances. Most of the trailing exits we will describe are specifically designed to allow profits to run indefinitely. Therefore they are best used with trend following type systems. In counter-trend trading, more aggressive exits are more suitable. The “when you’ve got a profit, take it” philosophy works best when you are trading counter-trend, since the anticipated amount of profits is limited. However, to take quick profits in a trend is usually an exercise in frustration: we exit the market with a small profit only to watch the huge trend continue to move in our direction for days or months after our untimely exit. We therefore recommend using different exit strategies based on the underlying market condition. We will discuss the more aggressive exits later; for now we will concentrate on exits designed to accumulate large profits over time.
A thorough understanding of trailing stops is critical for trend-following traders. This is because trend following is typically associated with a lower percentage of profitable trades; which makes it particularly important to capture as much profit as possible when those large but infrequent trends occur. Typical trend followers make most of their profits by capturing only a few infrequent but very large trends, while managing to cut losses effectively during the more frequent sideways markets.
The rationale behind the use of the trailing stop is based on the anticipation of occasional extremely large trends and the possibilities of capturing substantial profits during these major trends. If the entry is timely and the market continues to trend in the direction of the trade, trailing stops are an excellent exit strategy that can enable us to capture a significant portion of that trend.
The trailing stops we will describe in this and following articles have similar characteristics that are important to understand as we use them to design our trading systems. Effective trailing stops can significantly increase the net profits gained in a trend-following system by allowing us to maximize and capture large profitable trades. The ratio of the average winning trade to the average losing trade is usually improved substantially by the use of trailing stops. However there are some negative characteristics of these stops. The number of profitable trades is sometimes reduced since these stops may allow modestly profitable trades to turn into losers. Also, occasional large retracements in open trade profits can make the use of these stops quite difficult psychologically. No trader enjoys seeing large profits reduced to small profits or watching profitable trades become unprofitable.
The Channel Exit
The simplest process for following a trend is to establish a stop that continuously moves in the direction of the trend using recent highest high or lowest low prices. For example, to follow prices in an uptrend, a stopmay be placed at the lowest low of the last few bars; for a downtrend, the stop is placed at the highest high of the last few bars. The number of bars used to calculate the highest high or lowest low price depends onthe room we wish to give the trade. The more bars back we use to set the stop, the more room we give the trade and consequently the larger the retracement of profits before the stop is triggered. Using a veryrecent high or low point enables us to take a quick exit on the trade.
This type of trailing stop is commonly referred to as a “Channel Exit”. The “channel” name comes from the appearance of a channel formed from using the highest high of X bars and the lowest low of X bars for shortand long exits respectively. The name also derives from the popular entry strategy that uses these same points to enter trades on breakouts. Since we are focusing on exits and will be using only one boundary ofthe channel, the term “channel” may be a slight misnomer, but we will continue to refer to these trailing exits by their commonly used name.
For most of our examples we will assume that we are working with daily bars but we could be working with bars of any magnitude depending on the type of system we are designing. A channel exit is extremelyversatile and can work equally well with weekly bars or five-minute bars. Also keep in mind that any examples referring to long trades can be equally applicable to short trades.
The implementation of a channel exit is very simple. Suppose we have decided to use a 20-day channel exit for a long trade. For each day in the trade, we would determine the lowest low price of the last 20 daysand place our exit stop at that point. Many traders may place their stops a few points nearer or further than the actual low price depending on their preferences. As the prices move in the direction of the trade, thelowest price of the last twenty days continually moves up, thus “trailing” under the trade and serving to protect some of the profits accumulated. It is important to note that the channel stop moves only in thedirection of the trade but never reverses direction. When prices fall back through the lowest low price of the last twenty days, the trade is exited using a sell stop order.
The first and obvious question to answer about channel exits is how many bars to use to pick the exit point. For example, should we set our stop at the lowest low of 5 days or the lowest low of 20 days, or someother number of days? The answer depends on the objectives of our system. A clearly stated set of objectives for the system is always very helpful at these important decision points. Do we want a long-termsystem with slow exits or do we want a short-term system with quicker exits? A longer channel length will usually allow more profits to accumulate over a long run if there are big trends. A shorter channel willusually capture more profits if there are smaller trends. In our research, we have found that long-term systems generally work well with a trailing exit at the lowest low or the highest high of the last 20 days or more.For intermediate term systems, use the lowest or highest price of between 5 to 20 days. For short-term systems, the lowest or highest price of between 1 to 5 days is usually optimal.
Trailing stops with a long-term channel accumulate the largest open profits if there is a sustained trend. However this method will also give back the largest amount of open profits when the stop is eventuallytriggered. Using a shorter channel can create a closer stop in order to preserve more open trade profits. As can be expected, the closer stop often does not allow profits to accumulate as nicely as the longerchannel, and often causes us to be prematurely stopped out of a large trend. However, we have noticed that a very short channel length of between 1 to 3 bars is still highly effective in trailing a profitable trade in arunaway trend. The best type of channel exit to use in a runaway trend is a very short channel, for example 3 bars in length. We have observed that this exit in a strong trend often keeps us in a trade until we areclose to the end of the trend.
It appears that there is a conflict of exit objectives here. A longer channel length will capture more profit but give back a large proportion of that profit; a shorter channel length will capture less profit, but protect moreof what it has captured. How can we resolve this issue and create an exit that can both accumulate large profits, as well as protect these profits closely? A very effective exit technique calls for a long-term channelto be implemented at the beginning of the trade with the length of the channel gradually shortened as larger profits are accumulated. Once the trade is significantly profitable, or in a strongly trending move, the goalis to have a very short channel that gives back very little of the large open profit.
Here is an example of how this method might be implemented. At the beginning of a long trade, after setting our previously described money management stop to avoid any catastrophic losses, we will trail a stopat the lowest low of the last 20 days. This 20-day channel stop is usually far enough from the trade to avoid needless whipsaws and keep us in the trade long enough to begin accumulating some worthwhile profits.At some pre-determined level of profitability, which can be based on a multiple of the average true-range or some specific dollar amount of open profit, the channel length can be shortened to take us out of the tradeat the lowest low of 10 days. If we are fortunate enough to reach another higher level of profitability, like 5 average true ranges of profit or some other large dollar amount, we can shorten the channel further so thatwe will exit at the lowest low of 5 days. At the highest level of profitability, perhaps a very rare occurrence, we might even be able to place our exit stop at the previous day’s low to protect the great profit we have accumulated. As you can see, this strategy allows plenty of room for profits to accumulate at the beginning of a trade and then tightens up the stops as profits are accumulated. The larger the profits, the tighter ourexit stop. The more we have, the less we want to give back.
There is another way of improving the channel exit that is worthwhile to discuss: this is to contract (or expand) the traditional channels using the height of the channel, or some multiple of the average true range. How this might work is as follows: Supposing you are working with a 20-day channel exit. First you calculate the height of the channel, as measured by the distance between the highest 20-day high and the lowest 20-day low. Then you contract the channel by increasing the lowest low value and decreasing the highest high value previously obtained to determine the exit points. For instance, in a long trade, you could increase the lowest low price by 5% of the channel height or 5% of the average true range, and use that adjusted price as your exit stop. This creates a slightly tighter stop than the conventional channel. More importantly, it allows you to execute your trade before the multitude of stops that are already placed in the market at the 20-day low.
The last point can be considered an important disadvantage of the channel exit. The channel breakout methods are popular enough to cause a large number of entry and exit stops to be placed at previous lowest low and highest high prices. This can cause a significant amount of slippage when attempting to implement these techniques in your own trading. The method of adjusting the actual lowest low or highest high price by a percentage of the overall channel height or the average true range is one possible way to move your stops away from the stops placed by the general public and thereby achieve better executions on your exits.
by Chuck LeBeau
While their application is extremely wide, we do not believe that trailing stops are appropriate in all trading circumstances. Most of the trailing exits we will describe are specifically designed to allow profits to run indefinitely. Therefore they are best used with trend following type systems. In counter-trend trading, more aggressive exits are more suitable. The “when you’ve got a profit, take it” philosophy works best when you are trading counter-trend, since the anticipated amount of profits is limited. However, to take quick profits in a trend is usually an exercise in frustration: we exit the market with a small profit only to watch the huge trend continue to move in our direction for days or months after our untimely exit. We therefore recommend using different exit strategies based on the underlying market condition. We will discuss the more aggressive exits later; for now we will concentrate on exits designed to accumulate large profits over time.
A thorough understanding of trailing stops is critical for trend-following traders. This is because trend following is typically associated with a lower percentage of profitable trades; which makes it particularly important to capture as much profit as possible when those large but infrequent trends occur. Typical trend followers make most of their profits by capturing only a few infrequent but very large trends, while managing to cut losses effectively during the more frequent sideways markets.
The rationale behind the use of the trailing stop is based on the anticipation of occasional extremely large trends and the possibilities of capturing substantial profits during these major trends. If the entry is timely and the market continues to trend in the direction of the trade, trailing stops are an excellent exit strategy that can enable us to capture a significant portion of that trend.
The trailing stops we will describe in this and following articles have similar characteristics that are important to understand as we use them to design our trading systems. Effective trailing stops can significantly increase the net profits gained in a trend-following system by allowing us to maximize and capture large profitable trades. The ratio of the average winning trade to the average losing trade is usually improved substantially by the use of trailing stops. However there are some negative characteristics of these stops. The number of profitable trades is sometimes reduced since these stops may allow modestly profitable trades to turn into losers. Also, occasional large retracements in open trade profits can make the use of these stops quite difficult psychologically. No trader enjoys seeing large profits reduced to small profits or watching profitable trades become unprofitable.
The Channel Exit
The simplest process for following a trend is to establish a stop that continuously moves in the direction of the trend using recent highest high or lowest low prices. For example, to follow prices in an uptrend, a stopmay be placed at the lowest low of the last few bars; for a downtrend, the stop is placed at the highest high of the last few bars. The number of bars used to calculate the highest high or lowest low price depends onthe room we wish to give the trade. The more bars back we use to set the stop, the more room we give the trade and consequently the larger the retracement of profits before the stop is triggered. Using a veryrecent high or low point enables us to take a quick exit on the trade.
This type of trailing stop is commonly referred to as a “Channel Exit”. The “channel” name comes from the appearance of a channel formed from using the highest high of X bars and the lowest low of X bars for shortand long exits respectively. The name also derives from the popular entry strategy that uses these same points to enter trades on breakouts. Since we are focusing on exits and will be using only one boundary ofthe channel, the term “channel” may be a slight misnomer, but we will continue to refer to these trailing exits by their commonly used name.
For most of our examples we will assume that we are working with daily bars but we could be working with bars of any magnitude depending on the type of system we are designing. A channel exit is extremelyversatile and can work equally well with weekly bars or five-minute bars. Also keep in mind that any examples referring to long trades can be equally applicable to short trades.
The implementation of a channel exit is very simple. Suppose we have decided to use a 20-day channel exit for a long trade. For each day in the trade, we would determine the lowest low price of the last 20 daysand place our exit stop at that point. Many traders may place their stops a few points nearer or further than the actual low price depending on their preferences. As the prices move in the direction of the trade, thelowest price of the last twenty days continually moves up, thus “trailing” under the trade and serving to protect some of the profits accumulated. It is important to note that the channel stop moves only in thedirection of the trade but never reverses direction. When prices fall back through the lowest low price of the last twenty days, the trade is exited using a sell stop order.
The first and obvious question to answer about channel exits is how many bars to use to pick the exit point. For example, should we set our stop at the lowest low of 5 days or the lowest low of 20 days, or someother number of days? The answer depends on the objectives of our system. A clearly stated set of objectives for the system is always very helpful at these important decision points. Do we want a long-termsystem with slow exits or do we want a short-term system with quicker exits? A longer channel length will usually allow more profits to accumulate over a long run if there are big trends. A shorter channel willusually capture more profits if there are smaller trends. In our research, we have found that long-term systems generally work well with a trailing exit at the lowest low or the highest high of the last 20 days or more.For intermediate term systems, use the lowest or highest price of between 5 to 20 days. For short-term systems, the lowest or highest price of between 1 to 5 days is usually optimal.
Trailing stops with a long-term channel accumulate the largest open profits if there is a sustained trend. However this method will also give back the largest amount of open profits when the stop is eventuallytriggered. Using a shorter channel can create a closer stop in order to preserve more open trade profits. As can be expected, the closer stop often does not allow profits to accumulate as nicely as the longerchannel, and often causes us to be prematurely stopped out of a large trend. However, we have noticed that a very short channel length of between 1 to 3 bars is still highly effective in trailing a profitable trade in arunaway trend. The best type of channel exit to use in a runaway trend is a very short channel, for example 3 bars in length. We have observed that this exit in a strong trend often keeps us in a trade until we areclose to the end of the trend.
It appears that there is a conflict of exit objectives here. A longer channel length will capture more profit but give back a large proportion of that profit; a shorter channel length will capture less profit, but protect moreof what it has captured. How can we resolve this issue and create an exit that can both accumulate large profits, as well as protect these profits closely? A very effective exit technique calls for a long-term channelto be implemented at the beginning of the trade with the length of the channel gradually shortened as larger profits are accumulated. Once the trade is significantly profitable, or in a strongly trending move, the goalis to have a very short channel that gives back very little of the large open profit.
Here is an example of how this method might be implemented. At the beginning of a long trade, after setting our previously described money management stop to avoid any catastrophic losses, we will trail a stopat the lowest low of the last 20 days. This 20-day channel stop is usually far enough from the trade to avoid needless whipsaws and keep us in the trade long enough to begin accumulating some worthwhile profits.At some pre-determined level of profitability, which can be based on a multiple of the average true-range or some specific dollar amount of open profit, the channel length can be shortened to take us out of the tradeat the lowest low of 10 days. If we are fortunate enough to reach another higher level of profitability, like 5 average true ranges of profit or some other large dollar amount, we can shorten the channel further so thatwe will exit at the lowest low of 5 days. At the highest level of profitability, perhaps a very rare occurrence, we might even be able to place our exit stop at the previous day’s low to protect the great profit we have accumulated. As you can see, this strategy allows plenty of room for profits to accumulate at the beginning of a trade and then tightens up the stops as profits are accumulated. The larger the profits, the tighter ourexit stop. The more we have, the less we want to give back.
There is another way of improving the channel exit that is worthwhile to discuss: this is to contract (or expand) the traditional channels using the height of the channel, or some multiple of the average true range. How this might work is as follows: Supposing you are working with a 20-day channel exit. First you calculate the height of the channel, as measured by the distance between the highest 20-day high and the lowest 20-day low. Then you contract the channel by increasing the lowest low value and decreasing the highest high value previously obtained to determine the exit points. For instance, in a long trade, you could increase the lowest low price by 5% of the channel height or 5% of the average true range, and use that adjusted price as your exit stop. This creates a slightly tighter stop than the conventional channel. More importantly, it allows you to execute your trade before the multitude of stops that are already placed in the market at the 20-day low.
The last point can be considered an important disadvantage of the channel exit. The channel breakout methods are popular enough to cause a large number of entry and exit stops to be placed at previous lowest low and highest high prices. This can cause a significant amount of slippage when attempting to implement these techniques in your own trading. The method of adjusting the actual lowest low or highest high price by a percentage of the overall channel height or the average true range is one possible way to move your stops away from the stops placed by the general public and thereby achieve better executions on your exits.
by Chuck LeBeau
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