Transcript of a YouTube video by Adrian Reid advising traders to backtest time-stop and exit-rule hypotheses rather than following blanket rules. Reid emphasizes learning to test hypotheses (e.g., closing trades after X days) using backtesting software, and urges reviewing expectancy (average win × win rate − average loss × loss rate) because a low expectancy after 67 trades indicates a strategy problem.
Chapters
A complete trading system will tell you exactly what to do in all different circumstances. So if your trading system, if you back tested your rules and you could test this hypothesis of if a trade goes sideways for X number of days and doesn't hit the profit target, then exit it, does that improve my system? By learning to back test your trading ideas? You can answer questions like this yourself. I don't know if it will be better to cut these trades and take new trades or let them run. But if you put these rules into, say something like Amy Broker and you back tested them and then you said, okay, let's have these are the rules I'm trading. If I add the time stop, which gets me out after a certain amount of time, then you back test again, does it make it better? Does it make it worse? And that answers the question. So what we're about is empowering you to answer your questions like this. And this is the key. So I don't want to tell you close those trades or don't close those trades, but what I want to do is tell you to build the skill to answer great questions like this with analysis. Because in one market it might make sense to close them, but in another market it might make much more sense to wait and see them hit the profit target. But what I do know is that if you've got an expectancy of 0.04 R after 67 trades, your, your edge in your, in your trading decisions is very, very small, if at all. And what I would say is that you need to look at the expectancy equation. Yeah, the expectancy is the percentage of the size of your average win times the percentage of winners minus the size of your average loss times the percentage of losses. Look at that equation for your.
System, your approach that you're using and ask yourself would I be better off? Is instead of having a two hour profit target, I had a four hour profit target. I was right less often, but it was twice as big. Or maybe not have a profit target at all and have a trend following exit. So if a stock takes off, it just goes and goes and goes and I just keep holding it until it stops going up and starts going down.
With a expectancy that low after 67 trades, you need to change, you need to look at your strategy because I think there's probably something, something wrong, something missing.
So my best guidance is to, is to learn to backtest, put those rules in and then try some different exits, try some different widths of stop loss. You know, it might be that your stop loss is too tight and it's getting hit too often. It might be that your two are profit target is is capping your profits at too small a level and you would have been far better off to let the profits run. But you don't know that until you've done the work, until you've done the backtesting work. It's going to differ between all the different strategies, all the different systems. It.
