I've mentioned throughout the site that my research has shown that there might be a lot of raw edge associated with my stock trading strategy.
When I say raw edge, what I mean is that in the long run, the trading approach might be profitable even if you made some tweaks to the entries and/or exits.
The results of the following back tests help show why I say this:
Note: the average profit per trade is based on $1,000 of risk. Keep in mind that these are from back tests, and back tests have limitations.
Let's walk through these. The first row is the baseline -- this is the stock trading strategy I teach and that I use for my stock and options picks.
The second row is for a test where I made the profit target much closer. As might be expected, it has a higher win rate, but also a lower profit per trade. There is a potential tradeoff to be considered there. But either way, this approach still might have a solid edge according to the back test.
The third row is the same as my stock trading strategy, except the entry is "sooner". Instead of waiting for the price to get all the way down to the moving average line, instead the entry is made a quarter of an ATR above that line. I've seen so many times when the price is coming down and doesn't quite get to my entry and then turns around and goes straight up. The results here show that getting in at a higher price also has back-tested profitability.
The fourth row has two variables adjusted relative to my stock trading strategy. It has a 1ATR target (quicker profit) and also a shorter time to hold the position. It has less profit per trade than its counterpart on row 2, yet it also takes up less buying power since the position is held for less time. Yet another tradeoff to consider.
One takeaway from this information is that this trading setup might have a lot of raw edge. This is good because if it's profitable even when we tweak the parameters, it means it's even more likely to be a bonafide trading edge.
Another takeaway we get from the data in the table above is that you can make tweaks to the entries and exits and might still be within the bounds of the back-tested edge.
So if you like the idea of my trades, but you want to take a profit quicker, or you want to use a trailing stop, or you don't want to hold the position as long, etc, then you can likely tweak the trades to work for you and still fall within the parameters of the back-tested edge.
One word of caution: a downside to taking exits too fast is it can trigger the pattern day trading rule. If you take more than three same-day profits or losses in a one-week period, then you'll be flagged as a pattern day trader which requires an account balance of $25,000. If you don't trade with an account that big, then you will need to be careful to avoid taking exits so fast that they regularly result in same-day exits (also known as day trades).