What is an Entry/Exit System?

Ä    Note: It is not necessary to read this section in order to use TradingSolutions. However, understanding the concepts used in the program can help you to get the most out of the intermediate and advanced features.

An entry/exit system is a set of rules or conditions that specify when to buy or sell an investment. It is also referred to as a trading system in other literature. Upon applying an entry/exit system to a set of data, an entry/exit signal is generated. Entry/exit signals are indications of the best time to buy or sell a stock based on one or more factors in the market. They are also referred to as buy/sell signals or trading signals in other literature. These entry/exit signals can be backtested on historical data to determine the usefulness of the entry/exit system.

Here is a demonstration of a simple entry/exit system that only trades on the long side of the market:

Enter Long: CrossAbove ( MACD ( Close ) , MACDSignal ( Close ) )

Exit Long: CrossBelow ( MACD ( Close ) , MACDSignal ( Close ) )

An investment traded using this entry/exit system is purchased when the Moving Average Convergence/Divergence (MACD) indicator crosses above the MACDSignal indicator (the 9-day exponential moving average of the MACD) and sold when it crosses below.

Some entry/exit systems may produce better results for some stocks than for others. Also, for the same investment, different entry/exit systems often work better than others during different periods in history. The main goal of the technical analyst is to find the right entry/exit system for the right stock at the right time and know when to switch to a different entry/exit system when the current one starts to break down.

As mentioned in the previous section, a neural network can be used to generate an entry/exit signal directly, or its output(s) can be processed by an entry/exit system to produce an entry/exit signal. However, the nice thing about a neural network, when compared to a traditional entry/exit system, is that once the entry/exit system begins to break down, re-training on the new data that has been collected since the model was originally created will usually improve the results again.

&  Continue to the next section, What is a Neural Network?, or return to the Overview for this chapter.