Survivorship bias on the FTSE100 (LSE)

[nizar]

Surely, this would depend on the type of system one is developing / trading? In the case of a Trend-Following System, how can one effectively choose an exit in advance without sacrificing possible further profits, as isn't it normally a small minority of trades which produce the majority of the profit?

Hi Chorlton,

From the work Iv done (very limited in comparison to others on here), and from my dealings with established traders, trend following systems, give back alot of open profit at the end of the trend (and even throughout the trend). This is part of how they work. Taking profits prematurely is severely detremintal to long term performance. Take out the top 10 trades from your trade database and you will know what I mean.

If this is the case, by coding a pre-defined exit, isn't one seriously impacting on its overall performance?

If you are talking about profit targets, then yes I agree, I have tried it for my system at 20%/50%/100% and couldnt get it to work.

I wrote a post on my blog here regarding exits. And here as well.

Tech/a

I haven't heard or seen a stock go bankcrupt without going south first. HIH and Enron were on downtrends and gave you plenty of time to get out before they were delisted due to bankcruptcy.

From what I understood from david's email, TradeSim will exit the stock on the last bar it traded, and as usual the proceeds will be added to closed equity. It's only marked in the trade database as an open trade so you can differentiate it from the trades that were exited due to protective stop or normal exits.

 

[Chorlton]

Surely, this would depend on the type of system one is developing / trading? In the case of a Trend-Following System, how can one effectively choose an exit in advance without sacrificing possible further profits, as isn't it normally a small minority of trades which produce the majority of the profit?

Hi Chorlton,

From the work Iv done (very limited in comparison to others on here), and from my dealings with established traders, trend following systems, give back alot of open profit at the end of the trend (and even throughout the trend). This is part of how they work. Taking profits prematurely is severely detremintal to long term performance. Take out the top 10 trades from your trade database and you will know what I mean.

If this is the case, by coding a pre-defined exit, isn't one seriously impacting on its overall performance?

If you are talking about profit targets, then yes I agree, I have tried it for my system at 20%/50%/100% and couldnt get it to work.

I wrote a post on my blog here regarding exits. And here as well.

Thanks Nizar,

I shall take a look at your blog...

Regards,

Chorlton

 

[howardbandy]

Hi Howard,

Surely, this would depend on the type of system one is developing / trading? In the case of a Trend-Following System, how can one effectively choose an exit in advance without sacrificing possible further profits, as isn't it normally a small minority of trades which produce the majority of the profit?

If this is the case, by coding a pre-defined exit, isn't one seriously impacting on its overall performance?

Regards,

Chorlton

Hi Chorlton --

There may be a misunderstanding about what I mean by exit.

Say a trend following system enters a long trade on a moving average crossover or 14 day breakout. That same trading system has some logic to tell it when to exit the trade to go flat or short. That is the exit I am talking about.

The exit can be any of the five types I listed. Depending on the trading system development platform being used, the exit might be coded into the trading system, or it might be set as a parameter in the development platform.

An exit coded into the trading system looks like this:
Sell = Cross(MA(C,25),C); // sell when the price drops below its 25 day moving average.

Or this:
Sell = BarsSince(Buy) >=21; // Sell when the trade has been held 21 days.

Several exits can be coded into the same system -- which ever one is triggered first will cause the exit.

An exit that is set as a parameter in the development platform looks like this:
On a window there is a check box for "maximum percentage loss" and a place to enter a numeric value. Check the box and enter 5.0

Whenever the price of the stock drops 5% below the entry price, the position is sold.

Of course, this could also be coded into the trading system. It would look like this:
Sell = C < 0.95*BuyPrice;

So, my answer is that having an exit designed into the system does not depend on the type of trading system. All systems, long-term, swing, and intra-day, should have well designed exits. In fact, in my opinion, the exit is more important than the entry.

Thanks for listening,
Howard

 

[howardbandy]

If you are talking about profit targets, then yes I agree, I have tried it for my system at 20%/50%/100% and couldnt get it to work.

Hi Nizar and all --

About profit targets.

I find that profit targets work well for system with short holding periods -- a few days to a few weeks -- that are looking for gains of a few percent in each trade. They work poorly for systems that hold longer and are looking for spectacular price rises.

As an alternative method to exit from trades that hold a long time, investigate the parabolic trailing stop. I have found it to be quite effective at exiting from positions without giving up too much of the open profit.

Thanks,
Howard

 

[tech/a]

From what I understood from david's email, TradeSim will exit the stock on the last bar it traded, and as usual the proceeds will be added to closed equity.

And thats the point. If your system has you in a trade which sees the ticker taken off the board due to bankruptcy---then the amount added to your account is not there at all.
Infact 100% of the proceeds should be deducted from the running closed total of the closed equity.

Anyway enough said.
Interpret it any way you wish,your money.

 

[Chorlton]

Hi Chorlton --

There may be a misunderstanding about what I mean by exit.

Say a trend following system enters a long trade on a moving average crossover or 14 day breakout. That same trading system has some logic to tell it when to exit the trade to go flat or short. That is the exit I am talking about.

The exit can be any of the five types I listed. Depending on the trading system development platform being used, the exit might be coded into the trading system, or it might be set as a parameter in the development platform.

An exit coded into the trading system looks like this:
Sell = Cross(MA(C,25),C); // sell when the price drops below its 25 day moving average.

Or this:
Sell = BarsSince(Buy) >=21; // Sell when the trade has been held 21 days.

Several exits can be coded into the same system -- which ever one is triggered first will cause the exit.

An exit that is set as a parameter in the development platform looks like this:
On a window there is a check box for "maximum percentage loss" and a place to enter a numeric value. Check the box and enter 5.0

Whenever the price of the stock drops 5% below the entry price, the position is sold.

Of course, this could also be coded into the trading system. It would look like this:
Sell = C < 0.95*BuyPrice;

So, my answer is that having an exit designed into the system does not depend on the type of trading system. All systems, long-term, swing, and intra-day, should have well designed exits. In fact, in my opinion, the exit is more important than the entry.

Thanks for listening,
Howard

Hi Howard,

Ah... that makes sense now........ Thanks for the explanation......