This two DVD series on entries and exits is very much worthwhile. Charles LeBeau doesn’t try to WOW you. He just presents you with some very sage advice based on his many years of trading experience. I found the approximately 3 hours I spent on this course to be well worthwhile. I might even listen to this course a second time to make sure I have learned everything I can from it.
The first point he makes is that the markets have three directions – not two. They can go up, down, and sideways. Many people neglect the third to their detriment.
Next Mr. LeBeau fully explains the ATR. After this he goes on to explain how it can be used to find breakout triggers for trade entry points. He defines 4 ATR triggered “breakout” entry points:
- The price moves 0.6 ATR’s above the open price of the day (same day).
- The price moves 1.75 ATR’s above the previous day’s close.
- The price moves 2.25 ATR’s above the current 20-day moving average.
- The price moves 0.25 ATR’s above the highest high of the last 20 days.
If you get any one of these signals, you can normally expect to get a 4 ATR movement or better upward.
From here he moves on to explain the ADX. He explains that this cannot as easily be used for day trading because the gaps between days throw off the values if you are looking at short term trades. Mr. LeBeau discusses how ADX and other strategies can be used for effective entries. He cites three trending strategies in particular:
- You can buy on ADX breakouts. These have been called Channel Breakouts or the Turtle strategy. He seemed to recommend trading 3-day ma crosses of the 12-day ma after the ADX begins to rise. In other words use the ma cross as confirmation of your ADX uptrend. When the ADX line rises above the +DI line (or –DI line if it is a negative trend), that tends to be where the trend ends.
- You can buy on dips (either ATR dips or RSI dips).
- You can buy on trend continuation (MACD).
For non-trending strategies, Mr. Lebeau recommended the RSI, Stochastics, Williams %R, and various bands such as Bollinger Bands.
Mr. LeBeau’s next topic was exits. The exit determines the profit much more than the entry. You need to cut losses short, and you need to let profits run. If trading short term, you need to exit on strength. We can enter on our own terms. We need to exit on the markets terms. There are four priorities for exits:
- Set an initial stop loss to protect capital.
- Add trailing stops to further lower risk.
- Protect open profits.
- Take profits efficiently.
Mr. Lebeau introduced three important exits:
- The Chandelier exit.
- The YoYo exit.
- The Modified Parabolic Exit.
Often professionals use multiple strategies at the same time. They might use the Chandelier exit as a general trade exit. They would start by using 3 ATR’s from the highest high since the start of the trade. Then they would adjust the number of ATR’s in the trailing stop as the amount of profit in the trade grew. At 4 ATR’s of profit they might move the trailing chandelier stop down to 2 ATR’s. At 6 ATR’s profit, they might move the trailing chandelier stop to 1 ATR. The ATR’s would fluctuate in value as the volatility fluctuated. Thus they would take the volatility in the market into account.
In conjunction with the Chandelier, a money manager might use a YoYo exit. This might be 2 ATR’s from the previous day’s close. This would prevent you from losing more than 2 ATR’s in the same day. This detects important volatility reversals. After the trade has been going for some time, a money manager might start to use a Parabolic exit. This exit is probably not suitable for the beginning of the trade. However, it may perform better than other exits nearer the end of the trade.
A lot of money managers use more than one entry strategy at the same time. If they get an entry in the opposite direction on a second strategy, that can serve as an exit to the original strategy trade. Then they can enter the second trade in the opposite direction.
Mr. Lebeau mentioned a few good rules of thumb. Getting out after 15-20 bars is usually a good time frame. For moving average trades, try to get out after 30-50 bars. If the ADX is rising, let the profits run. If you get a high RSI of 70 to 75, you might want to exit. For position sizing, use 2% of your portfolio as a maximum. Monitor your performance at least once a month (or every 25 to 30 trades). Review your performance even when you are making money. Keep your strategy (s) appropriate for the trendiness of the market.
Finally Mr. Lebeau mentioned his two web sites: TraderClub.com and SmartStops.net. What I like about all of this was that he did not spend an appreciable part of the course time touting his products. He merely introduced them as good tools that one could use. I haven’t used them yet. However, I will likely visit his web sites soon. Again this DVD series is well worth the time. Mr. LeBeau is clearly trying to pass on some of his hard earned experience. It shows in the course.
This DVD set is available from Market Place Books.