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2018issue C0114-19

Evaluating profit-taking and reentry in trend following

Profit-taking was expected to raise the share of winning trades in Trend following, but cutting off a fat-tail run raised a reentry question. In the historical tests, none of the reentry methods approached the net results of the simple trend system that neither took profits nor reentered.

  • In the 80-day trend tests, only about 35% to 36% of trades were profitable even in markets described as trending, and winning trades lasted four to six times longer than losing trades.
  • The fat tail was a small set of unusually long, large winning trades whose gains were three to four times the size of the losses on the opposite side of the distribution.
  • Profit-taking raised the profitable-trade rate to 43.4% on a euro high-low breakout and to 50.2% on an S&P high-low breakout, while the S&P case saw net results and profit factor fall sharply.
  • Across the tested reentry choices, time in the market and exposure declined, but none of the reentry methods approached the net results of the simple trend system that neither took profits nor reentered.
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Current trackTrailing exit18 readingsBreakout system48 readingsTrend following89 readings

Profit-taking and the reentry question

Profit-taking was expected to raise the share of winning trades, but also to change the system profile if it cut off a later fat-tail run, which then raised the question of whether reentry was required.

The simple trend profile

Macrotrend holding periods were framed as roughly 40 to 120 days, with about 80 days used as a representative calculation period and 150 days treated as an upper bound that starts to resemble buy-and-hold.

In the 80-day trend tests, only about 35% to 36% of trades were profitable even in markets described as trending, and winning trades lasted four to six times longer than losing trades.

The fat tail was defined as a small set of unusually long, large winning trades whose gains were three to four times the size of the losses on the opposite side of the distribution.

The profit target

A long-side profit target was specified as entry price plus a profit factor times the 20-day average true range, with the same term subtracted for shorts.

Reentry after the target

On a euro high-low breakout with a 4.5 profit factor and a 1.0 minimum retracement, the profitable-trade rate rose to 43.4%, while time in the market stayed near 95% because reentry occurred quickly.

On an S&P high-low breakout with a 2.0 profit factor and a 1.0 minimum retracement, the profitable-trade rate rose to 50.2% while net results and profit factor fell sharply.

Across the tested reentry choices, time in the market and exposure declined and the percentage of profitable trades rose, but none of the reentry methods approached the net results of the simple trend system that neither took profits nor reentered.

The recurring failure of reentry was the gap after an exit: if price kept moving in the original direction, the missed portion of the move was hard to recover.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
17 of 18 in the Trailing exit track
202010-17 pp.Next on Trailing exitTreat the zigzag threshold as a volatility-scaled construction variableA new up or down zigzag segment is declared only after price changes by more than a pip threshold from the high or low of the current segment.
All readings on this track · 18 readings
  1. 1988Constructing a mechanical trend system with independent trailing exits
  2. 1991Write a staged RSI exit book with trailing stops
  3. 1993Evaluating filter-trigger trailing exits after breakouts
  4. 1995Weekly-close breakout entry and trailing exit in Eurodollars
  5. 1996Evaluating moving-average turn entries and slope exits
  6. 1997Precommit an equity-risk cap and a profit-retracement exit
  7. 1998Exit stops before entries
  8. 1998Exit rules evaluated with a fixed random entry
  9. 2002Construct the stay-or-flatten decision before entry
  10. 2006Audit the stop, trail, and risk-reward stack as one procedure
  11. 2007Building a momentum system with relative strength and trailing exits
  12. 2013When buy and hold needs a sell rule
  13. 2013A mechanical trend toolkit that turns screens into one entry-exit procedure
  14. 2014Is a two-period relative strength index, a channel breakout, and a trailing exit one long-only procedure?
  15. 2016Trend-aligned option entries and trailing exits
  16. 2017Monthly three-black candles as a trailing exit
  17. 2018Evaluating profit-taking and reentry in trend following
  18. 2020Treat the zigzag threshold as a volatility-scaled construction variable
By fieldEntry and exit rules206 readingsBy year201898 readings
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Also on Trailing exit5 readings
1993Evaluating filter-trigger trailing exits after breakouts2014Is a two-period relative strength index, a channel breakout, and a trailing exit one long-only procedure?1988Constructing a mechanical trend system with independent trailing exits1991Write a staged RSI exit book with trailing stops1995Weekly-close breakout entry and trailing exit in Eurodollars