In many ways, a consistently successful exit strategy is more difficult to utilize than an entry strategy.
While frequently overlooked, the exit may actually be more critical to overall trading success than the entry. A missed entry is just one missed opportunity out of many; a missed exit, on the other hand, could easily result in a trading account that is dramatically smaller. The exit system really has the toughest job. Every day it has to make the critical decision: “stay in or get out”.
The ideal exit strategy must exercise strict control over losses while allowing profitable trades to blossom to fullness. It will control your risk by quickly exiting from losing trades while allowing winners to mature. It can turn a losing system into a profitable one and can make a profitable system even more so. More than any other component, your exit strategy will determine if your system is a winner.
As stated above, a good exit strategy must allow for the:
The most comprehensive exit strategy will use multiple types of exits, always fitting the exit to the present market environment and risk tolerance of the trader. One of the simplest is a profit target exit using a limit order. If the market moves favorably by a specified amount, the limit is hit and profits are taken. Another is a time-based exit; if a trade lasted more than a specified number of bars/days, it is closed out regardless of profitability/loss.
There are a number of other types of exits, among them signal-generated exits, trailing exits, money-management exits, pivotal juncture exits, and volatility exits.
A signal-generated exit is an exit based on the use of a technical indicator/oscillator which issues a notice of an anticipated reversal in the direction of the market. A trailing exit is normally employed when the trade is progressing in your favor. It is an adjustable stop that you move in the direction of the trend to lock in some of your paper profits. If the market reverses, your trailing stop will cause your position to be closed out while keeping some part of your profit.
A pivotal juncture exit closes you out of your position when the market approaches a critical level, such as a moving average, a barrier of support or resistance, a trendline, a Gann line etc. Should the market move beyond this point, it would require your re-evaluation of market conditions; hence you would exit.
A money management exit closes out a trade at a specified dollar amount of adversemovement against you. In general, it stays in place for the entire time that the trade is on. Although it purports to mitigate your risk, your actual risk may be greater than the predetermined amount as limit moves or opening gaps could work against you.
There are many ways to determine where to place such stops but in the final analysis, the simplest is to merely specify the maximum amount you are willing to risk on any given trade. This can be tricky since if you have a very tight stop, you will be stopped out too often and if the stop is too loose, you will bear unnecessary incremental loss. Ultimately, you will have to find a stop that will control your losses without sacrificing too many profitable trades.
A volatility exit recognizes that your risk level is increasing due to rapidly rising market volatility. However, increasing volatility does not suggest a reversal of trend. It may only be the precursor of a big move, either friendly or unfriendly. If you perceive that your risk is rising due to higher volatility, it makes sense to close out ½ of your position. In this manner, if the market moves in your favor, you still have part of the trade on; if it moves against you, you have protected part of your profits.
To conclude, failing to exit at an appropriate moment keeps the trader exposed to the uncertainties of market risk and can be quite costly. However, determining the precise moment of exit can be a real challenge. Exiting too quickly runs the risk of leaving too much on the table. Staying too long poses the problem of profits turning into losses.
Traders would find their time well spent in developing a toolbox of exits which could be responsive to any and all market conditions.
While frequently overlooked, the exit may actually be more critical to overall trading success than the entry. A missed entry is just one missed opportunity out of many; a missed exit, on the other hand, could easily result in a trading account that is dramatically smaller. The exit system really has the toughest job. Every day it has to make the critical decision: “stay in or get out”.
The ideal exit strategy must exercise strict control over losses while allowing profitable trades to blossom to fullness. It will control your risk by quickly exiting from losing trades while allowing winners to mature. It can turn a losing system into a profitable one and can make a profitable system even more so. More than any other component, your exit strategy will determine if your system is a winner.
As stated above, a good exit strategy must allow for the:
- strict control of losses and
- full maturation of all profitable trades
The most comprehensive exit strategy will use multiple types of exits, always fitting the exit to the present market environment and risk tolerance of the trader. One of the simplest is a profit target exit using a limit order. If the market moves favorably by a specified amount, the limit is hit and profits are taken. Another is a time-based exit; if a trade lasted more than a specified number of bars/days, it is closed out regardless of profitability/loss.
There are a number of other types of exits, among them signal-generated exits, trailing exits, money-management exits, pivotal juncture exits, and volatility exits.
A signal-generated exit is an exit based on the use of a technical indicator/oscillator which issues a notice of an anticipated reversal in the direction of the market. A trailing exit is normally employed when the trade is progressing in your favor. It is an adjustable stop that you move in the direction of the trend to lock in some of your paper profits. If the market reverses, your trailing stop will cause your position to be closed out while keeping some part of your profit.
A pivotal juncture exit closes you out of your position when the market approaches a critical level, such as a moving average, a barrier of support or resistance, a trendline, a Gann line etc. Should the market move beyond this point, it would require your re-evaluation of market conditions; hence you would exit.
A money management exit closes out a trade at a specified dollar amount of adversemovement against you. In general, it stays in place for the entire time that the trade is on. Although it purports to mitigate your risk, your actual risk may be greater than the predetermined amount as limit moves or opening gaps could work against you.
There are many ways to determine where to place such stops but in the final analysis, the simplest is to merely specify the maximum amount you are willing to risk on any given trade. This can be tricky since if you have a very tight stop, you will be stopped out too often and if the stop is too loose, you will bear unnecessary incremental loss. Ultimately, you will have to find a stop that will control your losses without sacrificing too many profitable trades.
A volatility exit recognizes that your risk level is increasing due to rapidly rising market volatility. However, increasing volatility does not suggest a reversal of trend. It may only be the precursor of a big move, either friendly or unfriendly. If you perceive that your risk is rising due to higher volatility, it makes sense to close out ½ of your position. In this manner, if the market moves in your favor, you still have part of the trade on; if it moves against you, you have protected part of your profits.
To conclude, failing to exit at an appropriate moment keeps the trader exposed to the uncertainties of market risk and can be quite costly. However, determining the precise moment of exit can be a real challenge. Exiting too quickly runs the risk of leaving too much on the table. Staying too long poses the problem of profits turning into losses.
Traders would find their time well spent in developing a toolbox of exits which could be responsive to any and all market conditions.
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