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Serendipity Entry

Chandelier Exit

The Volatility Entry

The Yo Yo Exit

Serendipity Entry  Because we prefer to get our trades started in the right direction as soon as possible we spend a great deal of time experimenting with various setup conditions and entry triggers. If the setup conditions are favorable we will often trigger the entry on the long side of our trades based on an upward excursion from the opening price. We find that measuring favorable movement from the opening price rather than from the previous close tends to produce reliable entry signals that offer a high probability of success. This particular method of getting new trades started in the right direction is one of our personal favorites and it has been used as the entry trigger in several of our systems.

Late one evening while testing entry triggers on a new system we inadvertently coded the entry so that we would enter TOMORROW based on a specified price excursion from TODAY’S OPEN. We had originally intended to have the system enter tomorrow as the price moved upward from tomorrow’s open. However the mis-coded entry that was based on today’s open worked much better than we expected and it substantially out-performed our intended entry trigger. Our initial reaction to the outstanding test results was one of skepticism and we naturally assumed that this entry trigger might have been a mere fluke. We feared that perhaps we had simply stumbled into an accidental curve fit. However when we tested this entry method on other systems and with other setup conditions it continued to perform admirably. Because our discovery of this entry method was quite accidental we named it the Serendipity Entry Trigger and we immediately began to investigate to see if there was any logic behind the entry that might explain why it seemed to work so well in our tests.

Chart1

Our first chart illustrates a strong setup day where the close is well above the open. Because the close was strong and well above the open, there was very little upward price movement required for our Serendipity Entry Trigger on the following day.

Chart2

On our second chart the market closes very weak on the setup day and this weakness places our entry trigger well out of reach for the following day.

Chart3

On our third chart  we show a setup day with a close at mid-range but well above the day’s open. The Serendipity Entry now requires a fairly strong move on the following day in order to initiate the new trade but the trigger is easily within reach.

The Serendipity Trigger offers an important operational advantage as well as contributing to improved timing. When using the conventional trigger that is based on tomorrow’s opening price, our exact entry point cannot be calculated until after the opening trade has been posted. However one of the benefits of the Serendipity Trigger is that the exact entry order is available the day prior to the entry and our stop order can be placed prior to the opening.

Conventional Entry Code

  Buy("Long Entry") Open Tomorrow + 20 points stop;

Serendipity Entry Code

Buy("Long Entry") Open + 20 points stop;

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THE CHANDELIER EXIT: We have often advocated the importance of good exits and this is one of our favorites. The exit stop is placed at a multiple of average true ranges from the highest high or highest close since the entry of the trade. As the highs get higher the stop moves up but it never moves downward. (For future reference please note that we almost always give our examples from the long side and if there are any difference on the short trades we will try to point them out.)

Example of Chandelier Exit:
Exit at the highest high since entry minus 3 ATRs on a stop.
Or exit at the highest close since entry minus 2.5 ATRs on a stop.

Application: We like the Chandelier Exit as one of our primary exits for trend following systems. (The name is derived from the fact that the exit is hung downward from the ceiling of a trade.) This exit is extremely effective at letting profits run in the direction of a trend while still offering some protection against any reversal in trend. In fact our research and that of our friend Dr. Van Tharp has shown that this exit is so effective that we can literally enter markets at random and if we use this exit the results over time are likely to be profitable. (If you don't believe us just test it yourself over a handful of markets.) In general the best values for the ATR in most markets ranges between 2.5 and 4.0.

Coding the Chandelier Exit Several members have inquired about how to code the Chandelier Exit described in the Vol. 1 #2 Club Bulletin. Since I'm not a programmer I put out some calls for help. Quoted below is a suggested solution for TradeStation users provided to us by my good friend Terence Tan in Singapore:

MAX TRADE HIGH & MIN TRADE LOW USER FUNCTIONS

1. Create a User Function called "MaxTradeHigh", with the following code:

If marketposition < > 1 then MaxTradeHigh = -999999;

If marketposition = 1 and H > MaxTradeHigh[1] then MaxTradeHigh = H;

2. Create a User Function called "MinTradeLow", with the following code:

If marketposition <> -1 then MinTradeLow = 999999;

If marketposition = -1 and L < MinTradeLow[1] then MinTradeLow = L;

3. To use the Functions in a program, just reference the User Function names directly, e.g. Exitlong MaxTradeHigh -3 * Average (TrueRange,10) stop;

Once you define the User Functions, you never need to duplicate the code in any system when you need to code the Chandelier Exit.

Get the Code in Ela Format
Note: We have found in our work that it has been necessary sometimes to use a maxtradeclose, or maxtradelow. The ela file now contains the Functions Maxtradehigh, Maxtradelow, Maxtradeclose  and Mintradehigh, Mintradelow and Mintradeclose. 

Get the Code in Zip Format  Same files, just wrapped in a Zip file for those who cannot easily download raw ela files.

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The Volatility Entry

CATEGORY III C. -- ENTRY TRIGGER

This simple entry is generally one of the most reliable entry triggers for  trend following systems. It's always a good first try when you are looking  for a trend following trigger that produces better than random results. It is usually implemented by adding a percentage of the Average True Range to the close of the previous bar or to the open of the current bar.

For example we could design a simple but effective entry statement that says: "Buy when the price reaches the previous days close plus .70 of the 20 day Average True Range." (The .70 value is just an example, not a recommendation. The number of days to use in calculating ATR should usually be set at 20 or more or else the entry trigger can become too sensitive due to brief periods of unusually low volatility.)

This entry trigger seems to be more reliable than most triggers because it would require that prices make a strong directional move precisely as we are entering the market. Of course we wouldn't be entering at the cheapest price but we would be entering after a move that showed the market definitely had confirmed its direction. We would have to sacrifice some potential profitability (buying cheaper) for the higher reliability of getting into the market only when our selected market is moving strongly in the direction we expect it to.

The most common application of this entry is to measure from the previous close but we have a slight preference for applying it from the open.. We find that moves from the open tell us a lot about what the market is likely to do over the short run. You should always test it both ways. There are probably many other ways of applying this entry trigger (from the previous day's high or low for example) but we haven't had the time to explore all the possibilities.

Combine the Volatility Trigger with the Chandelier Exit and you have the basic ingredients of a primitive trend following system. As primitive as this system might seem it can often serve as a useful benchmark. Plug in your favorite values for the ingredients and try it on a market or two. Then use these results as a benchmark and see if you can improve the results with other ideas and other systems.

This will give you some way of measuring your progress and a method of evaluating other ideas you come up with. How does your latest idea compare with the simple Volatility/Chandelier benchmark?

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