Igor

Also referred to as "short selling," a Bear Position will actually lose money if the price of an asset rises. The investor sells the asset at one price and then hopes to buy back the asset at a lower price at a later date.

Exits for All Occasions When most people think about trading systems, they probably think about how the system enters the market. In fact, trading systems are usually described in terms of their entry technique, such as breakout systems, moving average crossover systems, Fibonacci retracement systems, and myriad other methods for entering the market. Even the terms "counter-trend" and "trend-following" refer more to the entry than the exit. Despite the common focus on entry techniques in trading, you may have come across the assertion that exits are more important than entries. In my experience, that's usually true. Why? One possible reason is that most market action is random. A good trading system finds at least some signal in all that noise. But with all the noise in the market, a substantial percentage of entry signals may be wrong. A long-term trend following system, for example, may be right only 40% of the time. Despite the low percentage of winning trades, it can still be highly profitable if it keeps the losing trades smaller than the winners. The way it does that is by cutting the losses short and letting the winners run. In other words, it's profitable because of how it handles the exits. Generally speaking, I think it's fair to say that exits are the principal method of controlling the intrinsic risk/reward characteristics of a trading system. Whether the system looks for a quick profit or holds the trade through the market's ups and downs depends on the exits. Likewise, whether a losing trade is cut off quickly or given more room to move is determined by the exits. Exits are truly the way to implement "cut your losses short and let the winners run." Note that I use the word "intrinsic" when describing the risk/reward characteristics of a trading system to differentiate the rules and logic of a trading system from position sizing. Certainly, position sizing can be used to improve the overall risk/reward ratio of a trading system, but position sizing is an external factor, apart from the rules and logic of the system. The focus of this article is on the rules and logic of trading systems, rather than on position sizing. Exit Types The following list is not exhaustive but it includes some of the most common types of exits you may encounter or consider for your own trading systems: Stop and Reverse. This is basically an "exit-less" exit. Stop and reverse systems reverse from long to short and back to long again. If you're long one contract, for example, you would sell two to close out the long trade and go short. You're never flat the market with this type of exit because each exit is also an entry in the opposite direction. N Bars from Entry. Exit the trade at the market N bars from the bar of entry, where N can be any number greater than zero. For example, you might exit the trade 10 bars from the entry. The duration of the trade will depend on the bar size; e.g., 5 min bars or 60 min bars. Time of Day. Rather than exiting relative to the entry, as with the previous method, you exit at a specific time of day, such as at 10:30 am. As a special case, this exit also includes exiting at the end of the trading session. Money Management Stop. This is a commonly used exit type that uses stop orders to limit the risk of a trade. For a long trade, a sell stop order is placed below the entry price. For a short trade, a buy stop order is placed above the entry price. When the stop is hit, the loss is limited to the size of the stop plus slippage. Common methods on which to base the size of the stop are a fixed dollar amount, a fraction of the average true range, or as a percentage of price. Trailing Stop. This type of exit uses stop orders to lock in a percentage of the open profit after a specified level of open profit -- the floor -- has been reached. For example, after an open profit of $500 has been reached on a long trade, you might place a stop order below the market so that 50% (or $250) of the open profit will be retained if the market reverses. The floor amount is typically computed based on either a fixed dollar amount or a fraction of the average true range. Note that a breakeven stop is a special case of the trailing stop where the percentage of profit to lock in is zero. Profit Target. The profit target uses limit orders to exit when a specified price has been reached, representing a profit for the trade. For a long trade, the limit order is above the market; for a short trade, it's below the market. Like a trailing stop, a profit target can help avoid giving back open profits when the market reverses. However, profit targets also place a limit on the maximum profit that's possible from a trade. Logical conditions/trading logic. In addition to the exit types listed above, just about any logical condition, such as those used for trade entries, can be used to exit a trade. Price Patterns. For example, a series of consecutive lower closes might be used to exit a long trade. Trend Indicators. For example, moving averages, momentum, and MACD could all be used to signal a trade exit. Trend Strength. For example, when the ADX indicator, which measures trend strength, declines below a certain level, a trend-following trade might be exited. Oscillators. Stochastic, %R, RSI, Bollinger bands, and other oscillators measure over-bought and over-sold conditions. A long trend trade might be exited when an oscillator crosses below the over-bought level, indicating the end of an up-trend. On the other hand, if the trade has been entered on weakness, such as a pull-back, a short-term trade might be exited when the oscillator crosses above the over-bought level. Support/resistance. Support and resistance levels can be used either as money management stop prices or as target prices EXITTESTS.ELD exittest.txt

Nonlinear Volatility Exits NONLINEAREXITS.ELD nonlinearexit.txt

Do Changing Markets Invalidate Your System? If you've traded the markets for any length of time, you've probably experienced the frustration that occurs when the market seems to start trading differently, and your previously successful system no longer seems to work. The recent increase in volatility in the stock indexes and the large intraday swings in these markets are a good example of changing markets. It's clear that the volatility has increased, but how can this be quantified and does it necessarily mean the system you're trading should no longer be trusted? MARKETCHANGE.ELD marketchange.txt

The Barra Risk Factor Analysis looks at company-specific risks, industry risks, and investment risks. These factors are then given a value from 0 to 100, with higher numbers indicating increased volatility.

Major market moves that are accompanied by high trading volumes tend to be viewed as more valid by the markets because a majority of traders are seen establishing positions. In these cases, we would expect to see a high ADTV reading.

The Ins and Outs of Scaling Out In general, scaling out means exiting part of your position at one price and part at another price. There may be several different exits for the same system. By comparison, scaling in means building a position by entering the market at different prices, also known as pyramiding. For purposes of this discussion, I'll assume that all entries occur at the same price; i.e., scaling out will be examined in the absence of scaling in. Scaling out is often presented as a way to reduce overall position risk. For example, if you enter long with two contracts and the market moves in your favor, you might sell one contract at a fairly tight target, then let the other contract ride. If the market continues in your favor, you would benefit from the contract you still hold. On the other hand, if the market reverses, you at least profited from the first contract. More precisely, here is the basic scale-out approach I'll discuss: Enter with the full position at one price. Set a money management stop for the entire position, and set a relatively tight profit target for one-half the position. If the target is hit, move the stop to breakeven and trail a stop for the remaining half of the position. SCALEOUTSYSTEMS.ELD scaleoutsystems.txt

Detecting Nonrandomness in the Markets Economists have long debated whether stock market prices change randomly or are at least partially predictable. The random walk hypothesis says that stock market prices change in a random fashion, making prediction impossible. However, more recent research has uncovered a variety of inefficiencies in the markets that disprove the random walk hypothesis. Certainly, any trader who has followed the markets for any length of time, let alone successfully traded them, doesn't need an academic study to tell them the markets are not entirely random. Nonetheless, there's some benefit to being able to demonstrate it mathematically. AutocorrelationInds.ELD auto correlation.txt

The AUTEX is one of the best ways of knowing which financial entiries are positioned for or against an asset at a given time. This can be useful during times of heightened uncertainty, as the trading bias of the market's larger players can be identified.

Auction Rates are important in debt-related securities and can allow investors to assess their potential returns. These auctions tend to smooth interest rate volatility and this makes these investments less risky relative to other asset types.

Since these auctions generally involve the acquisition of preferred stock, buyers are often larger investors looking to take major stakes in a company. These auctions are a good way of measuring the real market yield for safer assets.

When asset values are in decline, At-Or-Better orders are unlikely to trigger because buyers are less likely to enter into the market. Because of this, uptrends are generally preferable for these types of orders.

Traders tend to use At Limit during market periods meeting certain conditions. Examples include times of enhanced price volatility or situations when a large number of orders will be placed at once.

At Best orders tend to be executed more quickly than limit orders (or other types of conditional orders). Traders are only able to buy or sell an asset based on the available market price at a given time, so traders will look for efficient platforms in order to avoid paying less favorable prices when entering into positions.

As the trading environment becomes increasingly computer-based, instances of arbitrage are increasingly rare. Because of this, Arbitrageurs must enter and exit their positions quickly before the exploited inefficiency becomes apparent to more traders.

The Anti-Martingale System is based on the idea that it is best to capitalize on winning trades by increasing position sizes afterwards. This is different from the Martingale system, which requires that traders double their trade sizes after losing trades are seen.

Anonymous Trading is often sought by well-known investors that are looking to place large orders without attracting the attention of the market. Not all platforms allow for this approach but one common example is the London Stock Exchange.

In prior years, the AMEX was one of the chief competitors to the NYSE but has since been overcome by the NASDAQ. Most ofthe trading activity seen on the AMEX is in ETFs, small cap stocks and derivatives.

Allocation Notices are necessary because a large majority of contracts in the options market expire worthless. Because of this, options sellers are not always aware of times when contracts are exercised.

In order to keep markets functioning smoothly, Affirmative Obligations are usd so that buy and sell orders can match properly. Without these provisions, market gaps would be much more common and volatility would generally be higher.

Practitioners of Active Management in the markets will avoid using the Efficient Market Hypthesis, as they believe that human-oriented starategies can outperform the market. The opposite of Active Management is called "indexing," or "passive management."

The Absolute Return Index is used by stock traders as a way of comparing the performance of individual hedge funds with that of the wider market. When a hedge fund performs weakly against the Absolute Return Index, is it not considered to be suitable for investment.

The 2% Rule is a rough way of managing risk so that traders do not experience unexpected losses that are insurmountable. Conservative traders might risk less than 2% while more aggressive traders might choose to risk more.

Since the delivery time for the majority of forex trades is two days, traders can avoid taking physical posession of the currency using this method. An added advantage in someof these cases is that traders can avoid interest charges when selling high yielding currencies.

One of the reasons the City has achieved its reputation as one of the financial world's business sectors is the fact that it is now the largest currency trading district in the world. Currency trading volumes passed those seen in New York City in recent years and the district is a major source of forex liquidity.