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One step ahead – New groundbreaking Research Part 6

By January 27, 2012January 31st, 2024SPA3 Research, Uncategorized

From the Share Wealth Systems R&D Team

New Exit Signals

The objective of the 2011 SPA3 research was to increase returns and reduce portfolio drawdown by implementing new timing and money management concepts. No mean feat. But on the positive side we had an existing system in place to measure the success or failure of any new concept we tested.

A decision was made early to split the research into two separate streams so a focus could be maintained. The first phase would focus on timing and once complete, Money Management would become the focus.


As with any research, numerous trialed concepts we’re proven to be ineffective and these were excluded from being used in the system while other concepts showed great promise. In all, no new entry criteria (timing) would make it’s way into the new look SPA3 but groundbreaking improvements were seen when new exit criteria (timing) were introduced.

Four new exit signals were found to offer enough improvement, some more significant than others, during Portfolio Simulation Testing to make their way into the SPA3 trading system. They were:

    • Profit Stop
    • Trailing Stop Loss (TSL)
    • HMRDCS
    • MFE Time Stop

Let me explain the technical principles behind each of these new signals. Stay with me here because these exit signals, mainly one of them, have changed my paradigm and the way that I look at the market.

Profit Stop:

The Profit Stop is a percentage profit target which differs depending on the volatility of the stock at the time of entry. The volatility is measured by the ATRVE (ATR exponentially smoothed then divided by current close price). The lower the volatility of the stock, the lower the profit target.

Different Profit Stop methods were researched and simple percentage targets based on price volatility were decided upon. Varying percentage targets were researched via a process of optimisation over a large sample of trades and default percentage levels were selected for the ASX by volatility level.

Click the link below to view a presentation by Gary Stone on the Profit Stop.

Click to play – Profit Stop

Trailing Stop Loss (TSL):
Various Trailing Stop Losses were researched. The objective of using a TSL as an override is to reduce the size of the average loss trade, reduce the variation of trade outcomes and to improve the overall system and for each volatility level. However, when a TSL is introduced, the average profit per trade, the win rate and the expectancy are negatively affected. Therefore it becomes a trade-off between allowing some relatively larger loss trades through to allow winning trades to continue without exiting them prematurely.

Research demonstrated that a TSL does not have a positive effect on all types of trades. Lower volatility trades are affected negatively by a TSL while more volatile trades can benefit from a TSL, but not too close a TSL.

As with the Profit Stop, research showed that a percentage TSL based on stock volatility was as good an option as any other researched and is far simpler to understand and implement. Varying percentage TSLs were researched via a process of optimisation over a large sample of trades and default percentage levels were selected for the ASX by volatility level.

Click the link below to view a presentation by Gary Stone on the Trailing Stop.

Click to play – Trailing Stop Loss

The HMRDCS (High Market Risk Daily Confirmed Sell) is a filter and exit signal that is only used when the Overall Market Index, $XAO on the ASX (Australia) is in High Market Risk status, as defined by SPA3 overall market timing.

It is designed to filter out trades that are signalled during a High Market Risk that have potentially occurred too early. In so doing it will also filter out trades that would have gone on to be a juicy winner. However, these trades are typically signalled by another signal a little later in the price discovery cycle. Overall, more loss trades are filtered out than winning trades and, as such, this filter improves the system’s edge.

MFE Time Stop:
The MFE Time Stop is an exit signal that is used to hold onto the profit for trades that become profitable but don’t quite reach their Profit Stop target.

An MFE Time Stop is only applicable to trades that reach a minimum 61.8% of their Profit Stop target. If the 61.8% level is reached then the MFE Time Stop will instigate a time limit, based on falling trading days after the 61.8% level is reached, for the trade to continue higher. If it doesn’t continue higher within a number of trading days then the time stop will exit the trade.

These new SPA3 exit signals have made a profound impact on the overall performance of the systems expectancy and profit ratio. Before we look more closely at the old versus the new SPA3 statistics I want to share the core concept that changed everything.

If you are interested in learning more about the groundbreaking Research and how the SPA3 system can help your investing – Register for an obligation free demonstration

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