Trading Using 4-Way Exit Method

Many stock market traders use different types of sell signal to exit position. Since exit signal cannot be 100% reliable, some traders use stop loss and profit target to exit position. Not much research was done in the past to define if a combination of different exits can provide a better trading performance.

 

Addaptron Software has done numerous computer simulations using historical data of well-traded big ETFs. The research discovered that a better trading performance in a long run can be achieved by using four conditions for exit. The image below explains these four exit conditions.

 

4-Way Exit Method
1. Yellow area — exit by sell signal
2. Green roof — exit by reaching profit target
3. Blue wall — exit by exceeding time limit
4. Red floor — exit by stop loss

 

4-Way Exit Method has been implemented in computer program SMT1 by Addaptron Software. The software allows optimizing parameters of any exit combination. It can be only one exit, 2, 3, or all 4 exits. The table below shows one selected example of the different trading returns depending on exits combination.

 

Exit combination Annual Return, %
loss 27
signal 167
profit 360
time 308
signal, loss 177
signal, profit 360
signal, time 397
profit, time 617
profit, loss 447
time, loss 399
signal, profit, time 617
signal, profit, loss 447
signal, time, loss 470
profit, time, loss 617
signal, profit, time, loss 684

 

The simulations were calculated using backtest data for 12-month period from 2017-08-25 to 2018-08-24 (252 trading days). The research was based on the historical prices of well-traded big ETFs that represent a whole sectors, like Financial or Biotech.

 

Simulation using backtest data

Simulation calculated using backtest data for 12-month period to get optimal 4-way exits combination