There are times when your Trading Strategy goes long because your entry conditions have been met, but you notice a slight drop before the price continues its upward move.  The question is:  can you improve your profits if you wait to buy at a slightly lower price?  We developed a trading system that tested out this idea through use of a limit price.

In the example, the Trading Strategy includes a long entry rule that goes long if the close > Volatility Breakout High indicator.  The Volatility Breakout High indicator and the Volatility Breakout Low indicator form upper and lower bands of the Volatility Breakout trading system. The Volatility Breakout system is based on the assumption that when the price time series reaches a new high or low, it usually exceeds recent market volatility. A buy occurs when the price goes above the Volatility Breakout High. Similarly, a sell occurs when the price goes under the Volatility Breakout Low.  These indicators are part of the Advanced Indicator Set 2 add-on, but other trading signals such as neural net predictions, other crossovers, or rules may be substituted.

The Long Only Trading Strategy has a Long Entry condition of Close > Volatility Breakout High. The Long Exit directs the system to exit after a specified number of bars.  The results showed a 1 year return on account of 13.4% and a net profit of $1,586.

Next we used the same trading rules but added a limit price to the entry condition.

The rule above sets the limit price at the value of the close (when the condition occurred) minus 2.

We selected the subtract indicator above from the arithmetic category which says to buy at the close of the bar minus 2 (the exact value may be optimized).

You’ll see on the chart below that in Trading Strategy #2 there are more blue triangles (Long Entry Signals) on the chart compared to the first Trading Strategy, but there are not nearly as many blue X’s, which represent fill signals.   Even though there were less trades, this system produced some additional profit compared to the original Trading Strategy.  Trading Strategy # 2 returned a 1 Year Return  on  Account of 19.0% and a net profit of $2184.

The red line in the bottom subgraph displays the equity for the trading system that uses the limit price while the green area graph displays the equity for the original system that bought on market orders.

We found that the technique of using a limit order to buy at a slightly lower price worked on some stocks but not others using the Volatiliity Breakout indicator.  However we believe it is a technique worth exploring with other crossover  or Candlestick patterns generating the trading signals, or perhaps using a neural net prediction to create the trading signals.

You can obtain a copy of the example chart from www.ward.net in the Examples section