Chapter
Expert Exits
Originally presented in June 2002, the idea behind this simple swing trading sys-
tem is to maintain profitability while keeping losses as small as possible. The basic
system is the same as that used in the risk control and money management articles
about finding the best exit level (Active Trader, March through June 2002).
When a market makes a lower high than the previous day’s high and closes
below the open (reverse the reasoning for short trades), the system identifies this
as a correction against the anticipated direction of the trade. Any market that has
fulfilled these two criteria at the open of the next day’s trading is a potential trad-
ing candidate.
On the day of the anticipated trade, the stock also needs to open below the
previous day’s high (above the previous day’s low, for a short trade). With the final
criteria in place, an order can be placed to buy a break above yesterday’s high
(below yesterday’s low).
The logic can easily be altered. For example, you could require the stock to
take out the high from two days ago, or the close to be less than the previous day’s
close rather than the same day’s open.
The entry strategy is accompanied by a 1 percent stop loss and a 4.5 percent
profit target. To avoid tying up money in trades that go nowhere, any open trades
are exited after eight days.
A trade-sizing model was added to the entry rule. The system trades fewer
shares or contracts when the market is more volatile. In such conditions, the trade
size is based on four times the average true range over the last 10 days, with a max-
imum risk per trade of no more than 2.5 percent of available equity.
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