Simple and Effective Time Exits in FX Trading
In an effort to keep tightening up my trades to cut short losses and lock in profits quickly, I've been playing around with some timed exit strategies for the past week or so (in case you were wondering why it's been so quiet around here).
In my regular daily trading
I already have a very basic timed exit in place - after 24 hours in a trade, I'll either close it out or roll it over to the next day. But this is more a side-effect of the price data I used to design my trading system - I get the data in 24-hour units, so by default that's my minimum trading period.
However, I've been trying more aggressive trade-timing strategies via FX Engines, and so far, have managed to crank up the back tested performance of my best GBP/USD engine by almost 1000 pips. I did this by using the time-out feature in their engine design tool, specifying that the engine automatically closes out a trade after a certain number of days.
The underlying idea is that a trade is likely to be profitable within a certain time window, and after that, the chances of success drop off dramatically. This was already quite evident in the back tested results before I added a timed exit: successful trades averaged about 2.5 days in length, while unsuccessful ones tended to drag out for close to a week.
So, I figured, if the longest trades are most likely to fail, why not start cutting them short and see what happens?
What is the real-life test result?
After testing out that theory with a variety of timed exits, it turned out that there was indeed an optimal time period for my GBP/USD engine, after which the most profitable strategy was just to close out the trade.
This same principle might apply to your own trading. To find out, you could try timing every trade and then see how long a successful trade lasts, on average, versus how long an unsuccessful one takes. You could also monitor trades that closed quickly to see if they might have been profitable if they'd continued for a longer period.
Based on the data you gather, you may begin to notice patterns
Perhaps you let your trades run on too long, hoping they'll turn around when you should really be closing them quickly according to a strict timetable.
Or, on the other hand, maybe you're closing a lot of trades too soon because of tight stop-losses, or impatiently taking small profits instead of waiting for big ones.
Whatever the answer, you'll be on your way to discovering the most profitable timeframe for your style of trading. Hope you find it!