The entry is quite simple, we use a limit order. The thinking behind this is, if we identify a good candidate to trade, let’s make it a great entry and let the market come to us. It’s simple, it’s elegant and it works.
The exit is altogether different in that we have to give some of the control of the trade back to Mr. Market. I don’t like it, and I’m sure you don’t either, but that’s just the way it is. With an entry, if we get filled great, but if we don’t that’s OK as well. When exiting a position, we don’t have the luxury of, “its Ok if we don’t get filled,” we have to get out. Now we have to think about how to do that as elegantly as possible.
One way to exit is with a Market AT Open and get out first thing tomorrow. But another way is to exit with a Limit Order. Fortunately, with algorithms, we can test both ways and is why you’ll see both types of exits in the QiT portfolios.
Exiting with a Market at Open is easy enough because you just place an exit at Market for the next morning. However, exiting with a limit order is a little more involved and before you jump into that boat, you have to explore all the possibilities:
- What limit price do you use?
- What happens if the market opens below your limit price and never reaches it all day? How do you get out?
This is an excellent example of why working with an algorithm is superior to trading your own system that resides in your head. You are forced to make these decisions before you ever put on a trade – or change your trading system.
Here is how we exit a position with a limit order:
- Place a limit order to exit tomorrow X% below the close of today. (We will do optimizations on this percentage to ensure we use the best one).
- Place a MOC order to exit the position if the limit does not execute.
- Both 1 and 2 need to be tied together with a One Cancels All (OCA) order. Some brokers call this a One Cancels Other, or One Cancels Another but you get the point. I’m sure it’s obvious as to why these two orders need to be tied together. If the limit order executes intra-day, you don’t want to Sell at the Close, so the MOC order has to go away when the limit fills.
I know this sounds complicated (it’s really not) but what it does is add more reality to your trading. It’s a lot easier to just exit at market the next morning but by just adding one more order – the OCO/MOC order – you are taking more control of your trading and that is always a good thing.