The MarketDelta Blog

(This is a continuation in our blog series on creating a trading system from start to finish. Want to see more? Click here for our main RTL support page, which links to all the articles in this series and many more tutorials. Questions? Click here for the RTL Community Forum where you can get help on your programming.)

So far in this series, we have built a trading system based on an all-in, all-out trading style. That is, we enter all at once, and then exit the position all at once. However, many traders use a “scale-out” method whereby you gradually liquidate a position as it becomes more and more profitable. This allows you to lock in small partial profits and hold on for larger profits all in a single trade. Of course, it requires that you trade more than a single contract so you have “bullets in the gun,” so to speak, as the market moves more and more in your favor.

Today we will add to our existing system by creating rules and changing signals so we can take advantage of this method. Our system is already built to buy and sell 2 contracts. We will add one scale-out so each contract exits at a different time.

Another important benefit: After the first scale-out, most traders move their stop-loss to a break-even level (the original entry) so that losses are not possible on the trade once the first profit is locked in.

We shall create the rules that add these new scale-outs for long and short trades, and additional break-even stop-loss rules for each, for a total of 4 new rules.

Here are the steps to pull this off:

1. Change all existing rules, except for the entry rules, to a rule quantity of “All.” Since we have either partial or full positions now, this is the easiest way to make sure that, for example, the final (second) scale out isn’t set to liquidate 2 contracts when only 1 contract remains. We will keep the current exit rules as our second scale-out rules. To modify each of the affected rules, click on it in the Trading Rules list, change the quantity in the upper right, then click the Modify Rule button.

2. Change the Main rule to accommodate a new user variable should you choose to optimize this system, as per our last article in this series. In this example, I’m assigning V#5 to the profit target for the first scale-out (V#3 is already set as the main profit target, for our second scale-out):

Here I am keeping 5 points as the main profit target, and using 2 points as the first scale-out, with a 2-point stop-loss.

3.  Create the two new scale-out rules: one for long trades, one for short trades. The easiest way to do this is to open the existing SELL rule (for exiting a long) and immediately use the Save As button to save as a variation, such as SELL_SCALE. Then we use the POS_SIZE token (“position size”) as part of the signal, so this rule only triggers when you are carrying the full position. This allows the system to trade past this level after a scale-out and return to this level without exiting again before the second scale is reached. Change the user variable to V#5 instead of the V#3 in the second scale signal. The POS_SIZE token is always the value of your current trade size. It is 2 when you are long 2 contracts, zero when you are flat, and -2 if you are short two contracts. Here our our two new scale-out rules:

When you create rules from these new signals, use a rule quantity of 1 since you are only exiting part of the position.

4. Create two new stop-loss rules, where the stop loss is set to the ENTRY with a rule quantity of ALL. Also, use a POS_SIZE of 1 or -1 (depending on long or short trade) so the stop loss only triggers after the first scale out is completed:

Our 13 trading rules for this system after making these changes:

Last time we tested this all-in, all-out strategy using 5-points profits or 2-point losses (or end-of-day exit). The result from that backtest was a 250-day profit of $2420. Adding these new scale-out rules, we see a significant increase in net profit as losses are trimmed and profits locked in:

It’s worth noting, however, that the system is still not as profitable as it was prior to introducing stop-loss rules at all, as we noted in Part 7.