Focus on Exits

Here’s a comment that Justin left yesterday:

I read many charts these days and have some sense about enter a trade . For example, when 50 ema cross 200 ema and use kd as enter signal. It’s not bad for entry. After i coded my though and do back testing on tradestion. The result is not that positive cause I have to add exit signal for a complete strategy . For many times, even the entry is good, but the exit is bad that blow off the profit . The kd or rsi is very sensitive and in /out too often. I am very frustrated about exit strategy and would like to ask your help. What kind of exit methods can work in real trade ? Thanks for your help.

This is a great illustration of why exits are just as important as, if not more important than, entries. I think some type of trailing stop methodology is worth looking into. I can’t give a specific recommendation because so much depends on what suits a given trader’s style and/or the market conditions at a given time. Here are some ideas:

• Parabolic SAR (Stop and Reverse) – See Investopedia’s ‘Introduction to the Parabolic SAR’ and/or StockCharts.com’s article on the Parabolic SAR
• Yo-Yo Exit (that article discusses some methods of using Average True Range for exits)
• Chandelier Exit
• Adaptive Money Management Stops by Chuck LeBeau (I learned about all of the above types of stops from one of Chuck LeBeau’s seminars at a trading expo back in the day)

If you don’t want to get that ‘fancy’ you may want to do something similar to what I do. In general I push my stop to break-even once I get a 1R profit (R is my initial $ risk, i.e., how much I would lose if my initial stop was hit). As the stock continues to move in my favor I’ll push my stop up incrementally to lock in more gains. I usually try to lock in at least 33% of my gains one I reach 1.5R of profit on the trade. But none of this is exact, it’s definitely more of an art than a science (unlike the methods listed above).

For even more on stops and exits here are just a few of the posts I’ve written on this topic (which i found by doing a search on ‘exits’ and then another search on ‘stops’):

• Scaling Out of Trades / Partial Profits / Incremental Sales
• Exits Trump Entries
• Surviving Speculation
• Alan Farley on Exits
• A Question About Indicators
• Trailing Stop Techniques
• Free Positions!