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Hi All,
In today’s video, we discuss the book “Entry and Exit: Confessions of a Champion Trader” written by champion trader Kevin J. Davey.
Kevin is a full-time trader, author, and leading algo trading systems developer. He was at the top or near the top in a worldwide futures trading contest with triple-digit annual returns three years in a row, which makes him quite an authority in systems trading.
Kevin shares over 25 years of hard-earned wisdom in the book, which he says is not a shortcut to instant success but a toolkit for disciplined traders to refine their skills. He stresses the importance of rigorous testing before deploying strategies with real capital and warns against over-optimization, which can lead to strategies that perform well in backtests but fail in live markets.
Davey also advises keeping it simple because simple strategies often outperform complex ones. Markets tend to reward strategies with clear logic and minimal conditions.
In the book, Davey outlines 41 entry strategies and 11 exit strategies, which he emphasizes are not plug-and-play ready. They could be useful pieces in your strategy-building process and will likely save you a lot of trading capital you would have otherwise lost learning the ropes of trading.
The book offers a simple overview of each entry and exit strategy along with a code that you can deploy in the TradeStation terminal to test the strategy. As there are 52 strategies, Kevin advises picking one every week to test and finish testing all the strategies in a year.
This advice is most suitable for new traders who are starting afresh and are still in the process of figuring out the most suitable style for them. You can test all the strategies - not trading big money of course - and gradually identify your most suitable style, market, instruments, and time frame.
There are strategies to trade all kinds of markets like stocks, commodities, and forex for varying time frames from intraday to monthly. So, if you are a newbie, this could be a good starting point to explore trading.
On the other hand, if you are already trading a particular style, it will be best if you pick the strategies relevant to your trading system and test whether they complement your existing system. The key here is not to overoptimize your trading system. For example, it could be good as well as bad if you observe that adding a strategy or two from the book presents more trading opportunities.
It would be good if your trading system was hardly throwing good trading opportunities and would be bad if the trading system was already presenting good trading opportunities, but the number of potential trading candidates exploded after you tweaked your trading system with the strategy from the book. It just brought more confusion and sent you in prolonged analysis.
For example, there is an entry strategy called “moving average cross with a twist” from the book. Moving average cross is an age-old technical signal to jump in a trend for trend traders. However, as the strategy got popularised and more and more people started using it, its usefulness dwindled.
However, Kevin gives a twist to the strategy to identify opportunities that still offer a good profit potential. He advises to follow the signal if the current close has not run away from the previous bar’s low. This eliminates some of the crosses due to price spikes, which might just be a temporary overshoot or undershoot.
Now, if adding this rule to your trend-following strategy or simply adding the twist to your moving average crossover strategy improves your trading results, it would then make sense to plug it into your trading system. On the other hand, if the strategy works no better than your existing system, its good to move on.
Let’s understand how can I make use of some strategies from the book to perhaps fine-tune my trading system.
I look for breakouts in momentum quality stocks. I also have a system that works quite well already. Therefore, my sole purpose with the book would be to find ways to fine-tune the system to either eliminate bad signals that could be springing up in my system or get more good signals that may be overlooked by my system.
If I go about finding the relevant strategies for my system, I will look for breakout-based strategies. For example, the fourth entry strategy Kevin talks about is “breakout with a twist”. In this strategy, Kevin introduces a twist that can help eliminate failed breakouts using the ADX indicator as an additional criterion.
There is a further twist in how Kevin proposes to use ADX. ADX is supposed to measure the current trendiness of the price – a higher value means a larger trend is in progress. Therefore for trend traders like me, a higher value of ADX should be a pre-requisite.
However, Kevin advises taking entry on a breakout only if the ADX is indicating a non-trending period. This might seem counterintuitive, but the idea is that breakouts during a flat period may be more likely to produce big trends.
The key takeaway for me from the strategy is that a non-trending ADX for a breakout stock indicates that the stock has been sideways for a long time and the breakout may be because of a structural change in the underlying fundamentals of the stock. So, a bigger trend might just be starting and it could be rewarding to pursue the opportunity.
Kevin introduces another breakout entry strategy in the book. The “average true range or ATR-based breakout”.
In this strategy, Kevin focuses on the magnitude of the breakout for it to be tradable. To access the magnitude, he uses the ATR indicator.
ATR measures the movement range of the instrument in the lookback period. Simply put, if the ATR is $3 in a 15-day lookback period, then the price has moved in the $3 range in the past 15 days. If after 15 days the ATR doubles in the lookback period, that could mean that the stock has seen a strong breakout as the average range has shifted in such a short-time.
For example, here is Zoom’s weekly chart from the pandemic days. The 15-week ATR in these 15 weeks of consolidation hovered from $9 to $7. In the next 15 weeks, the ATR more than doubled to $20. As a momentum breakout trader, the stock would have interested me not only because of the doubled ATR but also because it hit a new high and broke out of a long consolidation. With all of that happening at the same time, ZOOM would have a strong potential trading candidate at the next base breakout. The stock ended up going 3x from the next base breakout before the rally ended.
You can see how I pulled two strategies from the book to check if they will complement my existing trading system. While putting them into my trading system requires further trials and testing but the initial test shows promise.
That is exactly what Kevin aims to do with his book unless you are a complete newbie and you are building a system from scratch. If you have an existing system, there may not be much need to overwhelm yourself with all the strategies listed in the book. Rather pick the ones that can improve your system, test them, and incorporate or discard them based on how the results or your trading statistics improve or worsen after the enhancements.
Kevin has delivered a lot of firepower to all kinds of traders in the book. Though a little more explanation of the strategies would be much desired by traders, Kevin has possibly skipped that to let the traders learn by implementing the strategies real time. Learning by doing is the best form of education. An added benefit is that Kevin has packed the book with algorithms for traders who want to automate their trading strategies.
My advice here is that you can pick whatever you find useful from the book based on your strategy and trading system but be ready to make further tweaks to plug the strategy well into your system.
Most importantly, when you are testing strategies, play light and always manage your risk well. There will always be an urge to be lax when the money at stake is too little but it’s prudent not to give in because that will impact discipline and psychology while trading.
If I were to rate the book, I would perhaps give it a 3.5-star rating. It still makes it a good read and a wonderful resource in all forms of trading.
As always, Thanks for watching
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