Claire asked me to clarify the use of trailing stops in the 4T’s system. I think this is a great chance to demonstrate the uses of exits as they are more dimensional than most realize.
In the 4T’s system I use a trailing stop that moves up (I am referring to longs - just think opposite for shorts), every time a new low forms. As I am using an ‘isolation low’ as my point of reference (after a trigger has taken place), to look for a trade, I suggest using the same when trailing the stops. The reason is because if you are looking for isolation lows after a trigger, you’ll become more familiar with the pattern, and thus making it easier to spot them during the trade to trail your stops.
Mark asked me, “If I wanted to use the 4T’s system or any system like it and add Elliott Wave to it or fibonacci, then how am I supposed to back test it to determine my average profit etc.”
That’s a great question and the simple answer is you can’t. Well not technically anyway. A lot of the attraction to mechanical systems is that they are easy to back test, not only because there’s no decision making, but also because you can just plug a system into a piece of software and presto!
But there are several ways in which you can test a discretionary system.
I’ve been asked by visitors to explain more clearly the formulas used for determining opportunities required based on a system performance metrics and the objectives set by the trader.
However, I’m going to give you a step by step process for doing this based on you having certain information already. I’ve also included a formula chart or worksheet you can follow to help you understand the process a little better.
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