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January 2008 Stocks and Commodities Traders Tips


Profit Locking & The Relative Price Channel

Original article by Leon Wilson
AIQ Code by Richard Denning


The AIQ code for The Bear Range Trailing Stop and the Bullish Zone Profit Locking Stop is given below together with sample code for a channel breakout (entry rule) system that uses the author’s profit locking and trailing stop for exits. These trading rules were not mentioned by the author. Since the exit technique is of a trend following nature, I used a channel breakout entry rule (a trend following entry method) in order to test the exit technique. Figure 1 shows a sample trade with the two indicators on a chart of AAPL. I also compared the author’s combined profit target and trailing stop to the result of just using the author’s trailing stop without the profit target stop. The trading rules are:

Enter a long position when (Test 1 and Test 2):
1) The close is higher than highest close in the last 34 days.
2) Use the NASDAQ 100 as a test list
3) Choose trades based on a proprietary relative strength formula (higher is better)

Exit a long position when:
1) Test1: Profit lock exit is true (close above Bullish Zone then a close below) or the close is below the Bear Range Trailing Stop
2) Test2: the close is below the Bear Range Trailing Stop

Using the NASDAQ list of stocks and AIQ’s Portfolio Simulation module, which simulates actual trading, I tested the above rules (long only) over the four-year plus period from 03/14/03 to 11/09/07. The results of the two tests are shown in Figure 2. For this test, using the parameters shown in the code, I found that adding the profit target did not improve the returns or the Sharpe ratio over simply using the author’s Bear Range Trailing Stop. Other parameters and other entry techniques may give the opposite results.

EDS Code for Profit Locking & Relative Price Channel
Profit Lock.EDS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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