A New Look at Exit Strategies

A presentation by Charles LeBeau for the

Australian Technical Analysts Association

Melbourne, Australia - October, 2006

Be sure to visit Chuck LeBeau’s “TRADERCLUB” at

www.traderclub.com

For a free copy of this PowerPoint presentation send an e-mail to

clebeau2@cableone.net

Exit Priorities

1. Set initial stop loss to protect capital. 2. Add trailing stops to reduce risk. 3. Add a breakeven stop. 4. Protect open profits. 5. Take profits efficiently.

It will probably require multiple exit strategies to handle all of the above.

Three Important Exits

1. The Chandelier Exit 2. The Yo Yo Exit 3. The Modified Parabolic Exit

Introducing the Average True Range (ATR)

The Average True Range is the largest of the following:

Today’s high minus today’s low. Today’s high minus yesterday’s close. Today’s low minus yesterday’s close.

RangeTrue Range

“True” range adjusts for gaps

Sketch - True range bars

The Chandelier Exit

A stop is placed 3 (?) Average True Ranges from the highest high or highest close since entry of the trade.

The stop moves upward as new highs are made.

The length of the chain on the Chandelier will automatically adjust to changes in volatility.

Adjusting the Chandelier Exit

Start new trades with default exit of 3 ATRs from entry.

As profits are accumulated, reduce the ATR units to lock in more profit.

Example: when open profit reaches four ATRs, reduce Chandelier to two ATRs.

Example: when open profit reaches six ATRs, reduce Chandelier to one ATR.

The Yo Yo Exit The Yo Yo Exit is similar to the Chandelier Exit except the Yo Yo Exit hangs down from the most recent close.

The Yo Yo Exit moves up and down with the closing prices. (Hence the name.)

The Modified Parabolic Exit

This trailing stop moves closer and closer to recent price as new highs are made.

ADX - Parabolic “V” Pattern

Wait until ADX is above both Plus DI and Minus DI, then expect reversal.

Reversal is signaled by crossing of Parabolic SAR point.

A powerful change of direction is expected. Works especially well in indexes.

Practical applications of ADX for exits

When ADX is rising - Be patient and look for big profits.

When ADX is falling - Be cautious and take profits quickly before they get away.

Other exits to consider

Trailing channel exits at lowest low in X days.

Moving average exits (Try 10 to 20 days in futures, 30 to 50 days in stocks)

Entry signal in opposite direction Time Exit - Exit after N bars (Good for

testing) Profit targets (Use ADX and ATR) High RSI - exit on strength - try 70 or 75

The ATR Ratchet - New

1. Ratchet factor - Select small unit of ATR - example: 0.05

2. Ratchet trigger - Select when to implement - example: as soon as profit reaches 2 ATRs

3. Low point - Select starting point - example: lowest low of last 10 days.

4. Multiplier - Keep track of number of bars since entry

5. Calculation - Multiply ATR factor times number of bars in trade and add to low point.

Example: When we get to two ATRs of profit we see that we have been in the trade for ten days.We multiply .05 times 10 and then add 0.50 units of ATR to the lowest low of the last ten days. This is our exit stop. The stop will rise .05 ATRs each day we are in the trade.

Logic behind the ATR Ratchet

1. It does not operate until some profit objective has been reached.

2. It relates the exit to the amount of time in the trade. It expects someunit of profit for each day we hold the trade.

3. As the market moves up, the starting point (10 day low) will rise. Since the starting point is rising and the bars since entry is increasingwe have two factors that are accelerating the exit point to lock in profits.

4. Very often near the top of the market the volatility will expand. The expansion of the ATR multiplied by the number of bars in the trade causes the Ratchet exit to leap upward in a timely fashion to lock in profits very near the top of the move.

5. It is a very flexible strategy that can be tailored to specific needs.

A quick look at the variables

1. The size of the unit of ATR can be controlled. Use small units to hold longer, larger units to exit faster.

2. The profit point used to implement the exit can be controlled. We could also implement the exit based on time instead of amount of open profit. For example we may chose to implement the exit after the trade has been open for twenty days. This would implement the exit whether the trade was a profit or not.

3. The point to which we add the ATR units can be varied. We can use the 10 day low, the 20 day low, the trade entry point, the low point of the open trade, a pivot point, a moving average or any other logical starting point.

SUMMARY: The ATR Ratchet gives us a great deal of control over the calculation of our exit point. It relates the exit to the amount of time spent in the trade which will help us to maximize our return per bar in the market. The exit is very sensitive to any increase in volatility and moves up very quickly to reduce risk and protect profits.

LeBeau DVD Package “How to Design, Test, Evaluate and Implement

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