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The Breakout Bulletin

The following article was originally published in the July 2002 issue of The Breakout Bulletin.

Answer to Your Question: Exits on day of entry

Short term trading on daily bars has certain advantages; notably, you don’t need the expense and hassle of real-time data. However, it also has certain limitations. Recently, I received the same question from two different customers regarding a trade that was stopped out on the day of entry. Even though the trade was stopped out, TradeStation showed the trade still long. I was asked if there was a problem with the MiniMax system logic.


The problem is not with the system. The problem is that TradeStation doesn’t always have enough information on the day of entry when using daily bars to determine if the trade was stopped out that day. Whether a long trade is stopped out or not on the day of entry depends on whether the market declines to your stop price after the trade is entered. If the low of the day is below the stop price, TradeStation has to make an assumption about when this low occurred. All it has to go on is the open-high-low-close. There is no information in a daily bar about the order in which these prices occurred during the day.


Consider the example below.



The daily bar is shown at left. The day opens near the low and closes near the high. We enter long at the green arrow. One possible scenario for the intraday price movement is shown as Scenario #1. The day moves lower after the open, and puts in the high near the end of day before closing off the high. In this scenario, the market never retests the low of the day, so we’re not stopped out.


However, Scenario #2 is also possible. Here, the market opens near the low, establishes the high of the day early, puts in the low following the high, and finally moves back up to the close. In this scenario, we’re stopped into the long trade during the first move up and stopped out on the way down to the low. Based solely on the open-high-low-close, it’s impossible to deduce which scenario occurred.


TradeStation assumes Scenario #1, which is statistically the most likely. Nonetheless, on some days, Scenario #2 will occur. When it does, TradeStation will show the trade is still long at the close, based on assuming the first scenario, even though the trade has been stopped out.


Of course, this is only an issue when the trade is stopped out on the day of entry. On any day following the day of entry, it’s simply a matter of checking to see if the low of the day is below the stop price (or the high is above the stop price for a short exit).


The lack of intraday information can also be a problem if you’re trying to day trade off daily bars. One common source of problems is applying a trailing stop to daily bars when the trade enters and exits on the same day, as it does for a day trading system. You can run into the same problem noted above. It’s possible to use the built-in trailing stop in TradeStation to develop a very impressive day trading system using a very tight trailing stop. Unfortunately, the results might be total fiction.


Let’s say, for example, that you’re working on developing a day trading system for the E-mini S&P and decide to run it on daily bars. You choose a trailing stop that waits until you have at least two points of profit then protects half the open profit. This might look great in the TS performance report. Unfortunately, in real trading, most if not all of your trades would be stopped out with one point of profit because it takes very little to move the S&P one point.


However, TradeStation doesn’t know anything about the intraday ups and downs when it only has the daily bar to work with. It uses the assumptions of Scenario #1. This means it assumes the trailing stop for your long trade is in place through the high of the day (see Scenario #1, above) before it starts to calculate the exit point based on protecting half the open profit as the market retraces from the high. In reality, you would have been stopped out long before the market reached the high of the day, even if Scenario #1 was largely correct.


The lesson from this is simply: if you’re using daily bars and have a lot of trades entering and exiting on the same day, take a careful look at the results to make sure TradeStation is reporting an accurate picture of what’s actually happening in the market.


That's all for now. Good luck with your trading.


Mike Bryant

Breakout Futures