800 700 600 500 400 300 200 100 0
s
Maximum profit ($)
Figure 4.9 A histogram of maximum profit in 1,565 losing trades over 20 years and 23 markets from the 65sma-3cc system. This is a maximum favorable excursion plot.
$3,000 were eventually closed out at a loss. However, we have to be careful with our exit strategy, since only 4 percent of the trades were mega-winners. If we are not careful, we may lock in some profits from losing trades, but lose out on the truly big winners. Another way to use the information from the maximum favorable excursion plot is to select the profit point at which to move your trailing stop to break-even. For example, you can move your stop to break-even after a $2,000 profit and capture a significant proportion of losing trades.
^bu can also use the maximum adverse excursion plot to set profit targets for scaling out of large positions. For example, if you were trading ten contracts, you could sell some at each of the profit targets of $500, $1,000, $2,000 and $3,000. We continue our analysis by examining the maximum drawdown in 777 winning trades following John Sweeney (see bibliography for details). This drawdown is on an intraday basis. These trades show some loss, but were eventually closed out at a profit. The histogram (Figure 4.10) reveals several interesting insights.
The 65sma-3cc Trend-Following System 87