Drawdown Entry Alert and V-Reversal Exit Strategies Explained

In this video, we discuss the concepts related to discretionary trading versus systematic trading and how recency bias can affect our observations when determining how to adjust a trading system.

We look at the existing exit strategies for V-Reversal NQ and the best setups for this individual strategy by removing the rule that exits shorts at the High + 1 and longs at the Low - 1.

Additionally, we discuss the recent equity peaks in Gap Continuation 2020 and how the Two System Portfolio that includes Gap Continuation 2020 NQ and V-Reversal NQ made an equity peak last week and after a rapid drawdown since October 29, we have a drawdown entry alert. Drawdown entry alerts allow an allocation or addition to a strategy or portfolio so that the risk to worse drawdown is less than what it would be when starting at an equity peak.

Trading systems use a consistent set of rules in order to consistently trade the market. Additionally, keeping a strategy simple requires that we don't have too many rules, otherwise we may have the tendency to "curve fit". When keeping strategies simple and being consistent, we have trades that may look really good and sometimes trades that look really bad.

The performance statistics for a trading system or trading systems portfolio can serve as a roadmap of expectations. The problem with discretionary trading is that recency bias makes us think that recent patterns are normal versus deviations from the norm. Adjusting your approach based on your recent observations will require constantly changing a strategy making consistency difficult. It can also put a trader in a position where they jump around from what was working to a set of strategies that stop working, similar to repeatedly buying the highs and selling the lows, generating big losses.

Human traders have the tendency to remember scenarios that did not work for a trading strategy while forgetting when those same rules were favorable and profitable.

Markets can change and new patterns may develop over time. Incrementally adjusting trading systems is a good approach as long as it is done based on longer term data with a consistent approach.

The V-Reversal test today for this video included:

• Removing the stop losses at the low - 1 for longs and highs + 1 for shorts, while keeping the 150 point stop loss and accelerated trading stop loss for shorts.

The V-Reversal test that was not in the video included:

• Not taking longs if the market has rallied 50, 100, or 150 points off the lows or shorting if the market has sold off 50, 100, or 150 points off the highs. The concept of "entering too late". The results were worse to add any of these rules. We have some recent trades that took longs off the lows after a large surge. While it did not work out recently, there is a longer history of trades that show the market does have follow through.

• Testing removing long stop losses at the lows - 1 or short stop losses at the highs + 1, separately, instead of at the same time while keeping the larger stop loss in place. I wanted to make sure that when we looked at the net results that we saw in the video, it wasn't just one-sided. This test confirmed that it was best to keep the stop losses in at lows -1 and highs + 1.

• Testing lows - 10, lows -50 for longs and highs + 10, highs + 50 for short instead of just +/-1. Results were worse.

The V-Reversal test that I want to do that is more difficult to test programmatically but may find a way with the Money Management Algorithms is a delayed entry where it would keep track of the original entry signal without taking it, and then enter at the low price on a rollover for longs (where it would normally be stopped out) or enter at the high of the day on shorts (where it would normally be stopped out).

To start with the Two System Portfolio NQ, a quarterly subscription link is below:

Two System Portfolio NQ

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To learn more about Exit Strategies, we just published:

Amazon Book ==> Algorithmic Exit Strategies for Day Traders on Amazon this year.

Complete Course with Downloads ==> Algorithmic Exit Strategies for Day Traders Course

Two System Portfolio Drawdown Entry Alert