The Benefits of an “Exit-at-Close” Trading System

08/24/2010 12:01 am EST


Every trader knows that daytrading stock index futures has certain advantages—and disadvantages. Some of the attractive features of intraday e-mini futures trading are these:

  • No overnight holding risk, which is a very big deal for most traders, especially in a world where political and economic news can wreak havoc in the markets at any time of day or night

  • Maximum use of trading account equity at brokers offering low margins for intraday traders

  • Daily feedback as to the ongoing validity of your particular trading system or methodology

Some of the key disadvantages include:

  • More “in-your-face” stress, especially if you use a discretionary trading method that requires very quick response to ensure a meaningful trade entry

  • Management of multiple charting screens, scanners, and news feeds can also add to the fatigue and stress factor

  • Futures traders who attempt to trade without a proven system or methodology have the added horror of the “leverage monster” nipping at their heels (and account equity), enduring the unenviable added pressure of seeing their margin accounts literally eaten alive, one day at a time

  • Finally, intraday e-mini stock index traders usually miss out on the infrequent, monster daily and weekly moves that the S&P 500, Nasdaq 100 and Russell 2000 indexes can make during the course of a trading year. This may not actually be a major disadvantage, however, since putting on a daily- or weekly-based e-mini futures trade in these indexes requires much greater initial risk and the trades occur much less frequently

Compared to swing traders, who may hold an open trade for one to four days, on average; position traders, who use long-term trend following methods and might hold a position from one day to five years (or longer); and stop-and-reverse traders, who are in a given market 100% of the time, intraday trend followers typically spend less than 10% of their time in the market playing their mechanical systems, and as such, their respective rates of return adjusted by the amount of time exposed in the market is truly outstanding.

Here’s a closer look:

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This is from a 15-minute bar swing trade system for the e-mini Russell 2000 futures contract over the past nine months. Sure, it made about $14,600 trading one contract ($20 round-trip commission per trade included) across a 143-trade, nine-month backtest, but look at how much time it spent in the market: More than 40%. This particular e-mini swing system holds trades overnight if needed, sometimes for as long as five calendar days. Now let’s take the same exact system and test it over the same exact dataset, only this time with a rule that instructs the system to exit any open trade by 4 pm ET—just before the end of the normal, daily e-mini Russell futures trading session.

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Yes, this version of the system made about $2,000 less profit, and it also made 34 additional trades over the nine-month backtest. However, if you look at the bottom of the report, you’ll also see that this “exit-on-close” variation of the system spent only 6.67% of the time in the market—less than a sixth of the time spent in the market by the swing trade (overnight hold) version of the same system. Now, I don’t know about you, but I’d gladly give up a minor chunk of profit in exchange for greatly reducing the amount of time my futures positions are open in the market. In a world of “flash crashes,” political revolutions, terrorist events, and economic meltdowns and bubbles, I’ll gladly welcome any sane technique that can reduce the risk of an otherwise profitable trading system or methodology.

Simply put, when you trade a winning intraday e-mini stock index futures system that goes to cash by the end of the regular daily trading session, you’re giving yourself extra protection against overnight “Black Swan” and other unpleasant surprise events that can wreak havoc with your account equity. In a world as crazy and unpredictable as the one we live in, this is surely a matter of prime importance to every serious trader, and one worthy of considerable evaluation. The lower the percentage of time in the market you need to make a nice living trading those markets, the better your odds are that you’re going to go on to enjoy a long and prosperous trading career, so make sure you inquire about this vital trading statistic before you purchase, lease, or subscribe to a given e-mini stock index futures trading system.

By Don Pendergast of
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