When
To Stop Trading A System
by Kevin Davey of KJ
Trading Systems
It is easy to know when to start following an advisor or
trading system - start trading as soon as you have determined
it is the right investment for you. But, do you know when
you'll stop following that new system?
Whether you are following your own trading system,
or following an advisory, newsletter or some other service,
if you don't have an exit plan for discontinuing it, you
should.
Why? Studies have shown that when people are under stress,
many times they make poor decisions. Certainly if you were
losing money with your systems you would be stressed. Consequently,
you might make a knee jerk reaction to the losses, or you
may stick your head in the sand and avoid a decision all
together. Both scenarios can be dangerous. So, the time
when you are losing is a bad time to determine when to exit.
Ideally, you already determined when to stop trading when
you first decided to trade the system. If not, it is not
too late. Just determine the metric(s) that are most important
to you. They could include such things as:
Maximum drawdown
Consecutive losers in a row
Amount lost in a week/month/year
Overall profit after X months
Overall winning percentage dips below XX %
Significant break in your personal equity trendline, or
equity moving average
New highs, or breaking of another "good" metric
(yes, some people try to quit at the top)
Anything that can be measured and monitored
The exact condition you select probably is not as important
as writing it down and sticking to it. That
is the key. It needs to be solid, definitive and
written down. Ideally, you'll also tell your spouse or a
friend, too, since it is harder to back out when you make
the proclamation public.
I've heard that one money management firm's exit criteria
is 1.5 times the maximum drawdown, and a 24 month commitment.
Those aren't bad, but the best one is the one that you feel
comfortable with - one you can stick with.
You'll definitely worry less about your system's
performance if you write down and follow your exit plan
- today!
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