The exit is always the most important trade…Can a subscriber idea for an exit modification improve results?
PDS issues an exit signal in the evening to be acted on at the next close. One of the subscribers left a comment on the site wondering whether selling a stock when it gaps on the open is better than waiting to sell it at the close. It is an interesting idea, and I decided to backtest it, although caveats must be added to the results (found after the summary).
I am using the 10% Equity Per Trade model as the baseline model as it will make the most trades. When conditions are right, it will have 10 open trades at once. This should give plenty of samples over the short term.
- Apply standard exit BUT close at open (instead of close) IF the open gaps more than X% above previous close.
- Commissions of .01/share included.
- De-listed data used (survivor free).
- The exit modification of selling the open when the stock will gap up MAY improve results (see caveats) as over the long-term tests, it has beat both the baseline and baseline with selling the open.
- Just selling at the open instead of the close has done well since 1.1.2011. However, over the long-term, selling at the open has slightly under-performed the baseline.
I think this is an interesting exit modification, and I’m grateful to Rick for introducing it. If one is an experienced trader and understands how to properly place orders, monitoring liquidity and the bid-ask spread, I believe this modification could improve results. Of course it would have to be applied diligently and consistently or the trader would likely introduce biases which would probably negate any positive benefit.
Trying to backtest selling the open because of a gap-up introduces a “look-ahead” bias. In real life, there is absolutely no way to know exactly where a stock will open. Yet, when backtesting, we know exactly where it opened and can then place our sells according to the open AND get the open price. In real life, if a stock gaps +4%, the likelihood of getting the exact open price is very, very slim. There is no sure-fire way to know that your sell order will fill for more than 2%, or 1% above the previous close. Thus, one must take these results as a guide, and not as the gospel. Furthermore, the open is notoriously illiquid, which can exacerbate the problems highlighted above.