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Peel Off Trading: What Is It, and How Do You Do It? (Strategies Analysis)

Last Updated on 17 February, 2024 by Trading System

In the world of trading, the emphasis is often placed on crafting impeccable entry strategies while giving minimal attention to exit techniques. One such exit method, known as the “peel off” strategy, has gained popularity among traders. But what exactly is “peel off” trading, and how can it help optimize your trading approach?

The “peel off” strategy, a term coined by Kevin Davey, entails a tactical approach to exiting a winning position. In this method, a trader exits a portion of their position at a modest profit, referred to as the “peel off,” while allowing the remaining portion to run for as long as the prevailing trend persists. Typically, when the first part of the position is exited, the stop loss for the remaining portion is adjusted to a breakeven level.

Table of Contents:

  1. Understanding “Peel Off” Trading
  2. Implementing the Strategy
  3. Comparing “Peel Off” with All-at-Once Exits
  4. Analyzing the Effectiveness of “Peel Off”
  5. The Testing Codes
  6. Results and Implications
  7. Key Considerations in the Analysis

Understanding “Peel Off” Trading

 The “peel off” strategy is a method for exiting a winning trade by dividing it into two segments. The first segment is closed for a small profit (the “peel off”), while the second segment is left open to capitalize on the prevailing trend. Importantly, the stop loss for the second segment is adjusted to a breakeven level once the first segment is closed. While Kevin Davey is credited with popularizing this strategy, it has been utilized by traders for many years.

It’s important to note that “peel off” trading is not a standalone trading strategy for entry but rather an exit strategy designed to optimize gains while minimizing risk. Instead of closing all positions at once, it allows traders to adapt their approach as the market evolves.

Implementing the Strategy

The “peel off” strategy can be applied in both discretionary and algorithmic trading. In discretionary trading, the trader manually executes trades and has the flexibility to choose between exiting positions all at once or in segments. Algorithmic trading, on the other hand, relies on computer algorithms to manage trades. Traders can implement the “peel off” method by coding it as a trade management algorithm, as an additional instruction for trade exits, or by building an entire trading strategy around it.

Traders have various ways to apply the “peel off” strategy, such as using the “half and half” rule, where they exit half of their position early and let the other half run. Alternatively, they may use different percentage combinations, such as 40%/60% or 30%/70%, to optimize their exit strategy.

Comparing “Peel Off” with All-at-Once Exits

The question of whether the “peel off” method is more profitable than exiting all positions simultaneously lacks a straightforward answer. Profitability depends not only on the exit strategy but also on the underlying trading strategy. The effectiveness of the “peel off” method may vary depending on the market conditions and the specific entry strategy used.

For instance, the “peel off” method may yield better results when applied to a trending market strategy compared to a range-bound market strategy. Therefore, its profitability depends on how well it aligns with the overall trading approach.

Analyzing the Effectiveness of “Peel Off” Trading

Kevin Davey conducted tests on the “peel off” technique using three distinct trading strategies:

  1. An intraday 1-minute bar ES strategy with no profit target and a wide stop loss.
  2. A 30-minute bar Gold swing system with both a profit target and a stop loss.
  3. A 360-minute Japanese Yen swing system with only a stop loss.

Davey compared the results of the “peel off” strategy with a baseline case where two contracts were traded and exited simultaneously. The tests were conducted over a period of 8 years, from January 1, 2007, to January 1, 2015, with 5 years of in-sample data and 3 years of out-of-sample data.

Results and Implications

The results of the analysis were mixed. For the intraday 1-minute ES strategy, the “peel off” technique often outperformed the baseline, yielding a maximum Return on Account that was more than double that of the baseline.

For the 30-minute Gold swing system, the effectiveness of the “peel off” method varied, with the profit target set at $250, resulting in nearly double the Return on Account compared to the baseline.

However, the 360-minute Japanese Yen swing system consistently underperformed with the “peel off” technique, with the optimum profit level set at $3,250.

The out-of-sample results were inconclusive, showing mixed performance with the “peel off” method.

Key Considerations in the Analysis

It’s essential to highlight some key issues with this analysis. The “peel off” method was tested as an exit strategy on existing trading strategies, rather than being integrated into the development of a complete trading system from the outset. A more rigorous approach would involve creating, testing, and optimizing a comprehensive trading strategy that includes the “peel off” method.

In conclusion, the “peel off” strategy appears to be a viable exit technique that traders can consider when developing their trading systems. Its effectiveness depends on various factors, including the specific trading strategy employed and market conditions. Therefore, traders should carefully assess whether the “peel off” method aligns with their overall trading approach to maximize profitability and minimize risk.

FAQ

What is the “Peel Off” trading strategy?

The “Peel Off” strategy, coined by Kevin Davey, is an exit method where a trader strategically exits a portion of their winning position, known as the “peel off,” while allowing the remaining part to run. The stop loss for the remaining portion is adjusted to breakeven once the initial segment is closed.

How does the “Peel Off” strategy work?

The strategy involves dividing a winning trade into two segments. The trader exits the first segment at a modest profit (the “peel off”) and lets the second segment run to maximize gains during a prevailing trend. Adjusting the stop loss for the remaining portion helps manage risk.

Can the “Peel Off” strategy be used in both discretionary and algorithmic trading?

Yes, the “Peel Off” strategy is versatile and can be applied in both discretionary and algorithmic trading. In discretionary trading, traders manually choose to exit in segments, while in algorithmic trading, it can be coded into trade management algorithms.

How can I implement the “Peel Off” strategy?

Traders can implement the “Peel Off” strategy by manually exiting a portion of their position at a predetermined profit level and adjusting the stop loss for the remaining part. In algorithmic trading, it can be coded as part of a trade management algorithm or an entire trading strategy.

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