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It is backtesting day. Let's have some fun. All you want to know about which entry to combine with which exit and which exit to combine with which entry will be clearer after today, at least for these five markets. So, entries and
Backtesting 500 trading entry-exit combos on 5 markets reveals which pairs perform best for long and short trades.
Key Takeaways
- Entries and exits must be combined thoughtfully as some pairs perform well together while others can be detrimental.
- Basic, unrefined strategies provide insight into entry-exit compatibility before optimization.
- Stop-loss and zombie trade exits (20-day max duration) are essential risk management components in all strategies.
- Mean reversion and trend following entries show distinct strengths and weaknesses depending on market conditions.
- Volatility-based entries require additional filters like volume to reduce false signals.
Summary
- The video presents a comprehensive backtest of 50 entry and exit combinations for long trades and 50 for short trades across five indexes, totaling 500 backtests.
- Entries and exits are rule-based trading conditions, including mean reversion, trend following, volatility momentum, volatility expansion, and price action entries.
- Exits tested include time-based, trend following, mean reversion, risk plus trend, target profit, volatility momentum, momentum strength, and price action exits.
- Backtests were conducted on daily timeframes using ProRealTime platform codes, which are freely shared in the video description.
- Position sizing was one per point, with trades executed during ordinary market hours and stop-losses triggered immediately.
- The study emphasizes understanding which entries work best with which exits rather than optimizing individual strategies.
- Mean reversion entry uses RSI 14 below 30 for longs and above 70 for shorts, effective in catching oversold/overbought bounces but weak in prolonged trends.
- Trend following entry uses 20-day moving average crossing 50-day moving average to capture strong trends but may lag in sideways markets.
- Volatility momentum entry triggers on price closing outside Bollinger Bands, good for explosive moves but prone to false breakouts.
- Volatility expansion entry enters after a breakout following the narrowest range bar in 7 days, spotting volatility squeezes but vulnerable to weak follow-through.
Chapters
- 00:00Introduction to Backtesting Study
- 02:16Overview of Trading Entries and Exits
- 04:48Backtesting Methodology and Parameters
- 06:42Mean Reversion Entry Explained
- 09:22Trend Following and Volatility Momentum Entries
- 11:25Volatility Expansion and Price Action Entries
- 12:45Exit Strategies and Risk Management
- 20:19Results, Insights, and Optimization Suggestions
Full Transcript — Download SRT & Markdown
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exits should not be treated as independent phenomena. An entry that is incredible for one type of exit can be devastating for another type of exit.
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Knowing which entry to combine with which exit will save you from making costly mistakes, making you a more profitable trader over time. And that is why I gave up on sleep last month and spent 100 hours doing this study. Back
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testing 50 entry and exit combinations for long trades and backtesting 50 entry and exit combinations for short trades on five different markets. When I talk about trade entries and trade exits, I'm talking about the rule-based conditions defining when we
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are entering a trade and when we are exiting a trade. One example of an entry is going long whenever RSI 14 goes below 30.
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RSI 14 smaller than 30. And one example of an exit is exiting a long trade whenever RSI 14 goes above 70.
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RSI 14 bigger than 70. I will in this video go through all entries and all exits that I used in this study in detail. By the way, after I made this video, I spent a couple of hours building the ultimate algo for each and
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every index based on the findings of this study. One for long, one for short for the five different indexes. So if you want these 10 algos, you can get them for free. Just click the link in the description and I will send the
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algos to your email. Okay, here are the five different trading entries that I used in this study. One mean reversion entry, one trend following entry, one volatility momentum entry, one volatility expansion entry, and one price action entry. I combined and back
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tested each and every one of these entries together with 10 different exits. A time-based exit, three different trend following exits, one mean reversion exit, one risk plus trend exit, one target profit exit, one volatility momentum exit, one momentum
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strength exit, and one price action exit. I then did these backtests for both long and for short trades for the five different indexes, meaning that I made a total of 500 backtests. You will notice that these entries and exits
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aren't refined. They are basic, and that's the point. The goal in this video isn't to build the most optimal entry, nor is it to build the most optimal exit. The goal is rather to get a better understanding and a feeling for which
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kind of entries work with which kind of exit. When you do have a better understanding of that, that's the time when you start refining and improving your entries and exits for your intended time frame and index. By the way, in the
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description of this video, you will find all 100 codes that I have used in my backtests and in this study. The codes are for the trading platform ProRealTime, and it's all free. So, I was maybe you should explain what a back
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test is. Yeah, you could look at it as a trading time machine. It makes it possible to trade your strategies on historical data. What it actually is is a simulation where you, with your defined criteria for your entries
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and your defined criteria for your exits, can run this strategy through history to see how it would have performed. And when we do a backtest, we get to see performance metrics like total gain, win rate, drawdown, etc.
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So that makes it possible for us to evaluate the quality of our entries as well as our exits. Okay. So in order for you to fully understand this study and the results of this study, you need to
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know these six points. All the backtests were done on the daily time frame.
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So this study is only considering these entries and exits on this one time frame. The backtests have been run on these five indexes on these date periods. The backtest position size is one per point, which gives more weight to
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the entries and to the exits in periods when the index has been higher, and in practice that means that the trades in the later parts of this date period have had a higher impact on the results. The backtests were done on the ordinary open
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hours of the different indexes. So we haven't used any instruments that trade outside the ordinary market hours.
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This also means that all entries and exits were executed in the morning the next day after the entry and exit conditions were fulfilled. The only exception from this is the stop-loss, which is executed immediately when the price reaches that level. Spreads and
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overnight fees are not included in the backtest. All strategies have, in addition to the backtested exit, also a stop-loss of 5% and a zombie trade exit that exits the trade if it's been ongoing for more than 20 trading days.
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Okay, let's start by going through the five different trading entries. They are all very simple. And by the way, if you want me to backtest another type of entry, drop me a comment below. I read and answer all comments. First up is our
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mean reversion entry. It's simply entering a trade when RSI 14 drops below 30, signaling an oversold market. For our short trades, we are entering the trade when RSI goes above 70, signaling an overbought market. So this entry is
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strong at catching oversold bounces in bullish markets and overbought bounces in bearish markets but has the disadvantage of struggling during prolonged downtrends or in prolonged uptrends. Here you can see an example of the entry for Dow Jones. We
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have a price drop here from the mean, and we enter the long trade here when the RSI 14 indicator goes below 30. Our second entry is a trend following entry where we enter the trade when a fast moving average of 20 days crosses above
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a slow moving average of 50 days, signaling a strong trend. And it's vice versa for the shorts. This entry is pretty great at riding established trends, but tends to enter a bit late and sometimes leaves money on the table
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in sideways markets. And here's an example of the entry for DAX 40. We enter the trade here when the fast moving average crosses the slow moving average. Our third entry is a volatility momentum entry where we enter a trade
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when the price closes above the upper Bollinger Bands of 20 days, which is signaling an increased volatility and an increased momentum. For the short trades, we do the vice versa. We enter the trade when the price closes below the lower
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Bollinger Band of 20 days. This entry is pretty good at catching these explosive moves when the volatility expands, but it can often also fail with false breakouts during low volume sessions. So, this is a clear improvement point to include volume as a
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condition together with this entry. Here we have an example of the entry in S&P 500 where the price breaks up out of the Bollinger Bands and closes above the Bollinger Band. The fourth entry is a volatility expansion entry where we
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enter a trade when we have a breakout upwards after the narrowest range bar in the last 7 days, which is signaling an expanded volatility and a breakout.
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One strength with this entry is that it's quite good at spotting volatility squeezes that are about to explode, but it fails easily if the breakout lacks a follow-through. Here you can see an example of the entry on NASDAQ
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100. Here we have a very low range in the seventh bar, which means that we enter the trade the next morning. How did you choose these different entries and how did you choose the different numbers? Yeah, you put me on the spot
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now because there isn't really any good great thought behind the selected values. I just quite randomly chose an arbitrary value and yeah, the point of this study, as I already explained, wasn't to find the best possible entry
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or to reach the highest possible returns but rather to investigate what kind of entry works with which kind of exit. And then as a second step, of course, you can refine it, you can improve it, you can optimize
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these values. So, this is act
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fifth entry is a price action entry where we enter a long trade if we have a bullish engulfing candlestick.
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And for our short trades, we are looking for a bearish engulfing candlestick. Engulfing means that the candle is fully engulfing the previous candle, which means that the open and close of the candle is exceeding the previous candle like this, signaling a strong movement.
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So this is a simple and quite intuitive pattern uh that works well in finding these turning points in the trend but it loses its reliability in strongly trending environments. Here we have an example of the entry in DAX 40 where we
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have a uh downtrend here which is followed by this bullish engulfing candlestick and then we enter the trade in the next morning. So that were the five entries. Now let's go through the 10 different exits. Our first exit is a
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timebased exit where we simply exit all trades after five trading days. So this is the same for both long and shorts.
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And as you understand this exit is fast, it's uh consistent. But the bluntness of this exit often leaves money on the table during strong trending markets. So here is an example where we enter the trade here. Five trading days passes and
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then we exit the trade here on the uh sixth morning. Our second exit is a trend following exit using the moving averages. This is the same moving averages as we used in our entry. So we exit a long trade when a fast moving
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average of 20 days crosses below a slow moving average of 50 days. So this is a clear indication of a decline in the trend strength. This exit allow big winners to develop in trends but it may lag significantly in exits when the
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trend reverses sharply uh which makes you lose unrealized gains. So this is the vice versa for short trades. Here you can see an example of the exit on SP500. Here's where we exit the trade when the uh slow
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moving average is crossed by the fast moving average. Our third exit is a mean reversion exit where we exit the trade when the price deviates too much from the mean which is signaling an overbought or an oversold condition.
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Again, we use the RSI 14 indicator where we for long trades exit the trade when RSI 14 reaches 70 and for short trades we exit the trade when RSI 14 reaches 30. So this is an efficient exit where
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we lock in gains when price returns to the mean. But it's a bit vulnerable if the momentum continues past this mean level. Here is an example of the exit on NASDAQ 100. Um we enter the trade here and then
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RSI 14 reaches 70 and then again we close the trade in the next morning. So this is the same values and indicator as we used in the RSI entry but uh reversed for the exit. Our fourth exit is another
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trend following exit where we use the parabolic F indicator. As you can see here this indicator plots a series of dots uh above or below the price to signal potential trend direction and reversals. And we simply exit the long
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trade when the price closes below a dot and we exit the short trade uh when the price closes above one of these dots. So here is the exit in action on OMX S30.
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We enter the trade here and then the price closes below one of these dots and that's when we exit the trade. Our fifth exit is a trailing stop exit where we move up the stop level when the price
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reaches a 2% gain. So we are continuously moving the stop level to 5% under the highest price since entry.
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So this protects gains. It manages downside with quite good precision but can get hit too early in volatile or wide ranging markets. So here's an example of the exit on DAX 40 where we have uh moved the stop-loss level and uh
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yeah ultimately the price goes below this level and uh yeah that's when we exit the trade. Our sixth exit is a simple target profit exit where we close the trade when we reach a 5% gain. So this is the
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same for both long and short trades. Um here is an example of the exit on SP500 where we enter the trade here. After a few days we have reached a 5% gain and then we exit the trade in the next
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morning. So this is uh one of the simplest exits in this study. Our seventh exit is a volatility momentum exit where we again use the bowlinger bands. uh we close a long trade when the price closes above the upper bowlinger
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band of 20 days and it's vice versa for the short trades where we exit the trade when the price closes below the lower bowlinger band. Here you can see the exit on NASDAQ uh we enter the trade here after a couple of days we have a
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price closing above the upper bowlinger bands and that's where we exit the trade. Our eighth exit is our third trend following exit where we close the trade when the price closes below a trailing moving average. Uh here we use
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an exponential moving average of 10 days and again it's the vice versa for short trades. So we keep the trade alive during clean trends but this exit can expose you to bigger drawdowns when the price do a sudden pullback. Here you can
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see the exit on OMX's 30. This white line here is the uh exponential moving average. Uh we follow the price up all the way here and here the price closes below the moving average and that's when we exit the trade. Our ninth exit is a
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momentum strength exit where we exit the trade whenever we have four consecutive green candles for long trades or four consecutive red candles for short trades. So this exit is smart for catching short bursts of strength and locking gains, but exits can trigger on
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noise rather than on true exhaustion. So there is a risk that you leave money on the table. And here you can see the exit for Dow Jones. We enter the trade here.
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And here we have four consecutive positive days. And that's when we exit the trade. Our 10th and final exit is our price action exit. It uses the engulfing candlesticks again where we exit the long trade when we have a
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bearish engulfing candlestick and we exit our short trades when we have a bullish engulfing candlestick. Here you can see the exit for Dow Jones. We are looking at a short trade here. So we enter the short trade here and uh after
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a few days we have a bullish engulfing candlestick here and that's when we exit the short trade. So that's the 10 exits that I back tested together with the five entries and I did that for the five different indexes that uh we are now
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going to look at. So let's go through the results index per index. Starting with the long trades of SP500. The best entry across all exits were the RSI entry where you simply enter a long trade when the RSI 14 is below 30. And
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the absolute best exit to combine it with was the moving average trailing stop where you exit the trade when we have a close below the exponential moving average of 10 days. This exit was almost four times better than the second best one. Let's
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look at the back test report of this entry and exit combination. So, it's actually pretty great results in the last 30 years.
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and especially strong in the last few years just straight up from here. And we can see that we were only in market 2.54% of the time. The win rate is only 52.78% but we have an average gain that
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is um three times bigger than the average loss. If we look at the worst long entry, that is the Ballinger band breakout which performed terribly across all different exits. I mean, with SP500 making a couple of thousand% of gains
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since 1950, a swing trading strategy that goes long uh needs to show some great gains.
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Otherwise, you could just do better by uh by doing a a buy and hold. If we look at the perspective from the exits, the best one is the moving average trailing stop and the worst one is the break even
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plus trailing stop exit. Let's take a look on the short trades. Um, by the way, I will share this document in the description of this video. If we look at the short trades, we can see that most numbers here are
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negative. And uh yeah, that is simply because most of these entry and exit combinations uh are losing money. And what does that tell us? Well, that is difficult to go short on SP500 in general and with these entry and exit
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combinations in particular. So, swing trading short on SP500 is a uh contrarian game and uh I would leave it for the daredevils. Negative results can still tell us something though. Um the worst entry is just as it was for the long
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trades, the Ballinger band breakout. The best entry is the RSI entry where we simply just enter the short trade when RSI goes above 70. So there are no great results here for the short, but you actually do make some money combining
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the RSI entry with one of uh these three exits. So the parabolic S exit, the trailing stop exit and the moving average trailing stop exit. The best short exit across all entries is the fourth consecutive bar exit where we
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exit the trade when we have four consecutive negative days. The worst exit across all entries is the moving average trading stop where we exit the trade when the price closes above an exponential moving average of 10 periods. Okay. So let's note the best
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entry and exit combination for every market. So SP500 the best combination for long was the RSI entry together with the MA trailing exit. And for short trades, it was the RSI entry together with the uh break even trailing stop exit. Let's
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take a look at the next index, NASDAQ 100. Starting with the long trades uh with the strong trend of NASDAQ 100. We see a lot of big numbers here for the long trades. The best entry is just as
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it was with the S&P 500 index, the RSI entry. And just like with the S&P 500 index, it works best with the moving average trailing stop, but it also works very well with the uh parabolic S exit.
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And if we look at the short trades, we see a slightly better result overall compared to the S&P 500 index, but it's still evident that shorting is more difficult than going long. The best short entry for NASDAQ is the moving
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average crossover, and it actually works pretty well with the break even trailing stop exit. I mean, it's not amazing, but considering the fact that these are very basic and nonrefined entries and exits on a strongly trending market, I would
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say that this entry and exit combination is promising and it's something worth considering working more on if you would like to build a shorting strategy for NASDAQ. If we take a look at the back test of that, we see that this strategy
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is in the market less than 1% of the time. So, it's not trading very often.
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And when it does, the average trade duration is 1 day. We have a 52% win rate and a profit factor of 1.59. And I think the results graph looks uh pretty okay from around here.
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So NASDAQ, the best combination for long was the RSI entry together with the MA trailing exit. For the short trades, the best combination was the MA crossover entry together with the break even trailing stop exit. Let's look at Dow
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Jones. So for the long trades, it's once again our mean reversion RSI entry that performs best overall. It's actually uh three times better than the second best.
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And just as it was with NASDAQ, it's best combined with the parabolic SR exit and the moving average trailing stop exit. Let's take a look on the back test using the moving average trailing stop exit. Um I really like how this graph
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looks like from around year 2000 here. Barely any draw down at all. It's looking good both in bullish and bearish periods. We have a profit factor of 2.37 and a time in market of less than 3%. The best exit across all entries was
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the parabolic SR exit. If we take a look on the short trades, we have some differences with the NASDAQ market. Uh here the worst performing entry was the moving average crossover entry which was the best one for NASDAQ. uh the best
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entry was the RSI entry and combining it with the fourth consecutive bar exit which is also the best exit uh across all the different entries. Okay, so Dow Jones the best combination for long was the RSI entry together with the M8
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trailing stop exit. The best combination for short trades was the RSI entry together with the four consecutive bar exits. Okay, let's take a look at the two European indexes. Let's start with the long trades for DAX 40. Again, the
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RSI entry proves to be strong here as well for the long trades, but for the DAX markets, it's better combined with the fixed bar count exit where we exit the trade after 5 days.
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And it's also great to combine with the four consecutive bar exit. But there's actually no big difference in the results between the exits here. Most perform quite well. Just avoid the moving average trailing stop exit and the parabolic s exit that actually loses
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your money. The best exit across all entries is the engulfing candlestick exit where we exit the trade when we have a strong bullish candlestick engulfing the previous candlestick. On the short side on DAX, the RSI entry is truly terrible. We have huge losses with
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this entry with all different exits. I guess most entries actually loses you money on the short side. So I would think twice uh before shorting DAX with any of these entries. The combination that performs best is the Bowlinger band
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breakout entry combined with the trailing stop exit which is also the exit that works best across all entries.
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So DAX the best combination for long was the RSI entry together with the four consecutive bar exit. For short trades, the best combination was the Ballinger band breakout entry together with the break even trailing stop exit. Let's take a look at the last
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index, which is my home index, the Swedish OMXS30 index. That u differs quite a lot from the other ones. The best entry for the long side is the MA crossover entry, and you should combine it with the fixed
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bar count exit, which is also the exit that uh works best across all the different long entries. The worst long entry is the Bowlinger band and the worst exit is the moving average trailing stop exit. On the short side,
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the best entry, although still negative in total, is the engulfing candle entry. However, it actually makes you some money together with the parabolic S exit and together with the break even trailing stop exit. But the break even trailing stop exit works pretty bad on
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the other entries. The best exit across all entries is the bowlinger bad exit which I find uh quite surprising actually. So, OMXS30 the best combination was uh for long was the MA crossover entry together with the fixed bar count exit. For short trades, it was
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the engulfing candle entry together with the break even trailing stop exit. So, what did this study tell us aside from what I just showed you or or told you showed you? Well, the first point that is evident is that a combination of
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entry and exit that works well on one market doesn't necessarily work well on another markets. Even though these markets are heavily correlated.
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So markets are not the same. So this means that you need to do your own analysis and your own back tests if you would like to use these entry and exit combinations for another index. Each market has its own
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personality and uh like for the OMXS30 seems to be rewarding trend following combinations whereas the DAX 40 punishes mean reversion combinations.
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So you need to do your own analysis on the uh index that you want to run these entries and exits on. So back test with care and don't assume what works on one market works on another market. I think
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another takeaway is that the mean reversion entry using the RSI 14 indicator works well on multiple markets with both long and short trades. It's the best performing entry in six out of 10 instances. And it's not just good,
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it's uh often three to 10 times better um on long trades than the second best one. So RSI 14 equals a very happy face.
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So if you're only going to test one entry, this is the one that you should test. Avoid using it on DAXs for shorts though where it was the worst performing entry. We can also conclude that the break even trailing stop works great for
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shorts. Break even trailing stop for shorts equals a also a happy face. However, for long trades it kills your gains prematurely. So break even trailing for longs equals a sad face. So test it before trusting it. It has
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consistently low gains compared to its time in market and in some cases it returns negative values um even with decent entries. I think that we can also conclude that you should avoid the moving average trailing stop for short
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trades. Being the worst performing exit in three out of five instances a trailing for shorts is an bigger sad face. For long trades, it works pretty good though, but only for the US markets. Ultimately, we can definitely conclude that the Bowlinger
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band entry is a bad idea overall for both long and short trades. Bowlinger bands a big sad face. It's the worst performing entry in eight out of 10 instances. Whoever said that the bowlinger band entry was a great entry
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was just bullshitting. This is the worst I've ever seen. The only exception is for short trades on DAX 40. So these are the insights that I base the 10 ultimate algos on. And I would like to show you two of my
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favorites. The first one is the long ALGO for NASDAQ where I used the RSI entry together with the MA trailing stop exit. I first lowered the stop loss down to 3.7%. For the entry, I changed the RSI value from 30 to 31. In addition to
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that, I noticed that September is a weird month for this code. So, I completely prohibited the strategy from from entering any trades in September.
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For the exits, I changed the M8 trailing stop value from 10 periods down to three periods.
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And I added a volatility filter that the bowlinger bandwidth must be over 0.12. And lastly, I changed the zombie trade exit to exit the trade already after 2 days if the bowlinger bandwidths are over 0.09. And that gave me these results. We
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have a profit factor of 13.38 with a win rate of 63%. We have a total gain of close to €15,000 with only €81 drawd down. The average gain is eight times bigger than the average loss and I think this equity curve looks
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quite great. Please note that this strategy although ultimate has a high risk of being overfitted. The second ultimate algo that I really like is the long ALGO for SP500. Just look at the results here from uh around year 2000.
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We have a win rate of 52%. We have a profit factor of 4.57 and with a gain of €2,17 with only 2.18% time in market uh we get a a great leverage for our capital. The max draw down is around 1
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nth of the total gain. And the improvements that I did was to well first I took the best combination of entry and exit uh which again was the RSI entry together with the MA trailing stop exit and then I added the bowlinger
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bandwidth again to only enter trades when the width is over 0.06. I kept the stop-loss and the RSI values as is. And then I added a condition to not enter trades in the second half of December. I also added a
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target profit that is two times bigger than the stop loss. So a target profit of 10%. For the exit, I changed the MA value from 10 down to 8. And lastly, I changed the zombie trade exit here to
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exit the trade already after 12 trading days instead of 20. These are two out of the 10 algos. Uh you can find all the 10 algos in the description of this video.
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By the way, again, if you would like me to back test something else, send me a comment below. I'm interested in all your ideas. So, what use is this study?
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Well, whether you are just getting into swing trading or if you are an experienced swing trader, the difference between what feels right and what is right can make a huge difference and can cost you months of gains. One of the
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most common mistake that traders do is to combine a good entry with a poor exit or a good exit with a poor entry and then they blame the entry or the exit or even the market. But the real issue was
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a mismatch between the two. So this study shows that the entries and the exits aren't plugandplayable and independent of each other. They interact. This study had no optimization, no filters and that was the purpose because I wanted to
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investigate how these entries interact with these exits and I wanted to do that by looking at the raw unrefined structure of these different kinds of exits and entries. If you don't want to use my ultimate algos, the ones that I
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coded, you could actually code your own algos based on these insights. I would recommend that you go into the index that you want to trade. You take the best combination of entry and exit and then you start building out of that. You
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could try something like reoptimizing the RSI values or trying another RSI value. Maybe RSI 30 is better than RSI 14 or even RSI 2 or RSI 5 or whatever. Uh you could try adding couple of filters perhaps a U
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moving average filter where you only enter short trades if the price is below the moving average of let's say 200 and you only enter long trades if the price is above the moving average of 200 or 50 or 100 or whatever. You could also
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explore maybe some volatility based exits. You could try testing these combinations on another time frame. You could try testing these combinations on another index. You could add a day filter. You could add a month filter.
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You could also consider adding volume as a criteria for entry. Uh so basically this study is a launchpad. Now you know which combinations of entries and exits work and that gives you a head start when you start coding. So this isn't
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just about numbers. It's about making better datadriven decisions as a trader. So what did we learn? Well, we tested 5,000 different 500 different trading strategy combinations and we found that some entries like the RSI14 entry are consistent and solid across multiple
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markets. We found that u some exits like the moving average trailing stop exit amplify those entries but only in the right context.
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And we also find that other exits like the break even trailing stop exit sound smart but almost always ruins your trades. And perhaps most importantly worth repeating, entries and exits need to be designed as a system combining the
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two not just as a list of individual components. If you want the full pro realtime code for all 100 entry and exit combinations, it's right in the video description below, ready for you to download and experiment with. I hope
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this gave you some real practical insights and that it gave you um a shortcut in your algo development journey. And if there's something that you are curious about, if you have any questions about the study, if you want
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me to back test something else, drop me a comment below. I read and I answer everything. And that's it. Thank you for watching. Thank you for subscribing.
Speaker A
Thank you for your thumbs up. I will see you in the next one. Bye.
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