Exits - déjà vu

Posted on July 25, 2008
Tags: Day Trading, Personal development, Trading Resources |

I’m getting fairly comfortable with my DAX trading style, particularly with timeframe, risk, entries and expectancy profile. One thing I am ’struggling’ with, i.e. tinkering and not really happy with much is exits. Which just reminded of something I wrote 3 years ago almost to the day. It was valid back then for stocks and is still valid now for futures. That’s because it’s just a sign of a developing trading style, one where there’s not enough experience and data yet to conclusively convince the trader to have faith and confidence in the rules. Many traders obssess with their entries, coming up with a gazillion indicators that will give them the ‘best’ entry. I have 4 short lines of rules written in a notepad text file. Exits though are tough, both to design and execute diligently.

Stops and Exits : Trader Eyal

The more I trade the more I find myself obsessed with stops and exits, it is an endless guesswork of what makes a better exit strategy, particularily for trailing once your initial stop is safe. One of the most annoying things as mentioned in an earlier post is to see a position reverese immediately after your stop was hit. But then instead of just getting upset about it the real value is in figuring out that if this is a repeated pattern then something is wrong with the stop strategy.

Have I become wiser since that post and is it easier now? Well yes and no. I have no problems at all taking a loss, you get used to that :-) especially with a 40% hit rate. A hard stop is always in place, position size is accordingly, stop is never widened, if it’s hit I’m out and that’s it. If it sets up again, I may re-enter. End of story. But exiting with a profit, now that’s a tough cookie especially on small intraday timeframes where end-of-day, end-of-week etc. are irrelevant. So, what are my general guidelines for designing my exits? I try to follow these rules:

Keep it as short and simple as possible (but without sarcificing quality)
Make it unambiguous, straight forward and easy to follow
No one can predict future prices, so let the market price tell you when to get out instead of guess when it’s “extended”
It’s never going to be perfect and you’ll almost never get out at the best place so (try to) stop fussing about it
You don’t need to get out at the top/bottom to make good money
Execute it consistently

Quite basic and simple, but oh-so-hard to do sometimes. I try to remind myself and keep in mind that if I followed my rule and got out too early, it’s a bummer but I accept it as part of the game/rules I set. But if I didn’t follow my rules and got out too early/late then that’s seriously disturbing for me, definitely something to avoid.