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This exit is extremely effective at letting profits run in the direction of a trend while still offering some protection against a major reversal in trend. In fact, our research has shown that this exit is so effective that you can enter futures markets at random, and if you use this exit, the results over time will be profitable. (If you don't believe us, just try it.) When used for long-term trend following, the best values for the ATR in most markets range somewhere between 2.5 and 4.0. |
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Neal: You also have another exit. |
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Chuck: Yes, the Yo-Yo Exit. This exit is very similar to the Chandelier Exit except that the ATR stop is always pegged to the most recent close instead of the highest high. Since the closes move higher and lower, the stop also moves up and down (hence the yo-yo name). Although this stop appears similar to the Chandelier Exit, the logic is quite a bit different. The Yo-Yo Exit is a classic volatility stop that is intended to recognize an abnormal adverse price fluctuation that occurs in one day. This abnormal volatility is often the result of a news event or some important technical reversal that is likely to signal the end of a trend. This logic makes the Yo-Yo Exit very effective, and we seldom regret being stopped-out whenever this exit is triggered. |
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We should caution you that the Yo-Yo Exit should never be your only loss protection, because if the price moves slowly against your position, the Yo-Yo Exit also moves away each day, and in theory, the stop may never be hit. |
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The Yo-Yo and the Chandelier exits work best when used together. The Chandelier Exit is typically set at 3 ATRs or more from a high point and never lowered; therefore, it will protect against any gradual reversal of trend. The Yo-Yo Exit is typically set at only 1.5 to 2.0 ATRs from the most recent close and will protect our position from unusual one-day spikes in volatility. When used together, the operative stop each day would be whichever of the two stops is closest. |
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