Getting StartedMoney Management

Avoid Stress when Managing Exits

Traders spend most of their time researching setups for trade entry, using fundamental analysis, chart patterns, signals from technical indicators, or some combination of these.

Yes, no doubt about it, finding entries is vitally important, because the entry is the foundation upon which a trade is built. However, if finding good entries is the most difficult thing, finding good exits is the most emotionally challenging part of the trading process!

Winning or losing, deciding on the exact time to close your trade can drive you nuts.

Common exits occur when traders get stopped out at a stop loss level, close the trade into high volume spikes, or attain predefined targets.

All trades should have a stop loss in place. Some traders hold a mental stop, others place physical stops in the market. Initially the stop is set at some level representing the maximum risk the trader is willing to bear if the market turns against the trade. Later, if the trade moves favourably, stops can be adjusted to lock in profits. Trailing their stops like this enables traders to stay with the market as long as a positive trend exists, until a trend reversal stops them out.

Stops are usually placed close to support and resistance levels apparent on the charts. Experienced traders can easily anticipate where most stops will be resting. Whenever a support or resistance level is penetrated there is often a sharp price movement as stops are triggered.

Frequently, trend moves reach a climax typified by steepening price movement on the charts AND very high volume. This is the moment when everybody is franticly trying to jump on board the trend, whatever the price, whatever the direction. Smart traders go against the crowd by closing positions into such spikes.

Other traders prefer to set targets for their trades. Target levels are frequently set near the next resistance level for long trades, or support level for shorts. Sometimes targets are based on a multiple of a market movement, or swing, already apparent on the charts. Other times, targets are set at a multiple of risk with no particular reference to the chart. Yet again, there are traders who look to mystical numbers (like Fibonnacci) to set their exit targets.

You have probably guessed that there is no right answer here. A technique may do well in a particular set of market conditions, but bomb in others. The skill of the trader may help, although there is no evidence that a trader relying on intuitive exits fares better than one who relies on the same exit every time.

As a day trader, there are certain psychological aspects to the exit which are important. A day trader can usually get into a trade quite quickly at the open. However, the exit may not come for a long time. Indeed, if no other trigger has arisen, the trade may be exited in the last few seconds of the market session.

So you have to decide whether to use an exit strategy that requires you to watch every tick of market action, or choose a strategy that lets you walk away.

To me, this is a no contest. I want to be liberated from watching the screen for hours on end on those days where the market goes nowhere. I also want to avoid psychological stresses as the market swings up and down. On good days, price moves directly to your target with barely a flicker. On other days, it gets there through a series of price gyrations. If you watch every move, your emotions are on a roller coaster as your paper profits expand and contract. The temptation to exit a trade early is sometimes huge.

For that reason, my preference is to avoid techniques which require me to watch the market, such as trailing stops behind support / resistance levels, or watching for volume spikes.

Instead, I prefer to set a target, a stop loss, and a market order to exit at the end of the session if neither of the other two orders fires. Connect these three orders in an OCA (one cancels another) group, and you are free to enjoy your day doing whatever you wish, confident that the trade is executing perfectly according to your predefined plan.

Another variation is to set an automatic trailing stop loss of fixed size. For example, you could specify a stop trailed exactly 4 points below the session high for a long trade, or above the session low for a short. That implements the trailing stop loss approach automatically without the need to identify support / resistance levels as the session progresses. Again, the trailing stop loss order may be connected through an OCA group to a market order exiting the trade at the end of the session if nothing else has happens.

Only those with practical trading experience will really understand, but believe me, the most stressful trading hours are those spent watching each market tick. Even if you are winning, you go through the torment of seeing large paper profits severely eroded during pullbacks. (Why, oh why, did I not sell at the peak?) Sometimes, you capitulate and take a small profit while it is still on the table, only to see price turn right round and race back up to new highs.

If you are a day trader, I strongly urge you to adopt an exit strategy that can be automated, so that your trade is left to work as planned without your being tempted to tinker with it. Come back at the end of the session and check your results.

Of course, I am talking here about day traders like myself who limit themselves to one trade per day. If you are a trader who enters dozens of trades each session, then nothing can save you from being incarcerated at your keyboard for the duration!

deco101

Junior member
30 0
This is a forum thread for discussing the Knowledge Lab Article, "Avoid Stress when Managing Exits".
Good artice, I agrre that exits are more difficult than entries but most systems concentrate on good entries.

I just let the candlesticks do the talking and combine with a Average True Range Indication for my optimal exit, but again there is no one correct answer and I find I am continously refining my approach.

Being chained to the screen well that is part of the job I find in some ways, hence I bought a pair of 23inch mac screens :) I trade the 1 hour charts eventually ill move to daily charts then I can go play golf....
 

EminiForecaster

Junior member
30 1
Didnt see it cover in the article but another good (or exceptable) way to exit and this works on any time frame, is what I call a time out stop. If you are trading say on a 1 minute bar bases and you enter at 10am and lets say you are in the money most of the day rule would say that if it has been more than say 60 bars (or 1 hour) since entry then exit this bar close. And also indicate that you cannot take the next trade in the same direction as the previous trade - this works better in non-trending markets like SP500.

Another tip you can use with a timed stop is only exit if its been more or equal N bars AND your openposition profit is greater than say $100 or 2sp500 points, then exit this bar close.

Once you are out let your system rules dictate to you what your next trade will be, sometimes in a flat market this can work pretty good especially with lower N bars to wait for.
 

timsk

Legendary member
6,921 1,799
Didnt see it cover in the article but another good (or exceptable) way to exit and this works on any time frame, is what I call a time out stop. If you are trading say on a 1 minute bar bases and you enter at 10am and lets say you are in the money most of the day rule would say that if it has been more than say 60 bars (or 1 hour) since entry then exit this bar close. And also indicate that you cannot take the next trade in the same direction as the previous trade - this works better in non-trending markets like SP500.
Hi Vadim,
Welcome to T2W.
I'm afraid I don't understand the logic behind your 'time out stop'. What's the significance of 60 minutes, as opposed to 5 minutes, 15 minutes or 47 minutes and 22 seconds? Also, you infer that the S&P500 doesn't trend. If you're trading a 1 minute timeframe, I'd say it trends most days. Last Friday is a particularly good example. Attached is 1 min' chart of SPY (which is a good proxy for the index). Of course, your definition of trend may be different to mine, but the first hour of trading looks pretty good to me. As it happens, your 60 min' time out stop would have worked very well here - perhaps you'd care to outline your thinking behind it?
Cheers,
Tim.
 

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EminiForecaster

Junior member
30 1
Hi Tim, based on the research over the years, intraday market tends to cycle in a little over an hour incraments, timed stop is design to no get stuck in flat markets but keep trading them and on trending days taking some profits, timed stop is a little know stratagy not used by many traders, you can optimize your hold time (how many bars you will be in a position) in your stratagy if you are using tools like TradeStation, if not you can view your past trades of you own system and see if having a timed stop would have helped.

PS Thanks for the welcome Time.
 
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Joey25

Established member
872 236
Hi Tim, based on the research over the years, intraday market tends to cycle in a little over an hour incraments, timed stop is design to no get stuck in flat markets but keep trading them and on trending days taking some profits, timed stop is a little know stratagy not used by many traders, you can optimize your hold time (how many bars you will be in a position) in your stratagy if you are using tools like TradeStation, if not you can view your past trades of you own system and see if having a timed stop would have helped.

PS Thanks for the welcome Time.
Thanks for sharing this Emini - it looks like a very useful area to look into.

Joey.
 

addy41

Newbie
3 0
Most of the trades that I enter are event driven so I usually have a date in mind for the exit when I enter. But even with that you do have to keep watch in case the market turns on you.
 

foroom lluzers

Veteren member
3,612 135