Exit strategies

[ivorm]

I've been trading (part time) for about a year and trade the European indexes (esp DAX). I'm increasingly becoming aware of the importance of having a good exit strategy for trades.

My entry strategy is simple but seems to take me in to good trades on a better-than-average basis. (It's based on MA crossovers and MACD).

But where I fall down (i think) is with the exits. The only strategy I have at the moment is to use trailing stops. I'm sure you know the problem : if I trail the stop too close, i get stopped out early on a price spike and then watch the index move even lower: if the stop is too wide, then I lose a large chunk of my profit when the trend reverses.

What exit strategies do you guys use ? I'm sure a discussion of the different types employed by the ppl out there would be useful to relative newbies like me.

TIA

 

[JonnyT]

Hi Ivor,

Pretty difficult but the two I use are profit targets and MAs turning. For example the 34MA on 30min charts for swing trades.

If you capture 50% of every big move then you really should be happy.

JonnyT

 

[Helenqu]

Hi Ivor,

I know what you mean. Trailing stops are great in a nice trending market with a low ATR but less good in a market with a higher ATR. I tend to use flat stops mostly but trail when it looks to be gently trending. I do check the ATR (although I don't have it on my charts as standard) but you can generally tell that from the candles anyway.

With the very short duration trades I go for I tend to use the CCI trend to keep me in/take me out, I also am now starting to keep an eye on momentum as it can give earlier signals of change than CCI does.


Not sure if this helps

 

[FTSE Beater]

Hi Ivorm

I presume that the entry gets you in too late to be valid as an exit.
As JonnyT said, if you can catch 50% then that is excellent - and try not to get greedy.

Exit strategies are very personal but you might want to try:

• Placing the stop below the last bars low on a long, or above the last high on a short
• Have a second set of MACD settings which are faster to get you out sooner rather than later
• Exit on the expansion of a bar. If there is a strong breakaway, then sell on the way up and get out before getting caught on the way back down. This is what Alan Farley teaches and its an art in itself.

HTH

 

[NickW]

How many ways can you skin a cat! I wish I knew the answer, here my exit method - at least for this week!

1). I keep a spreadsheet of all the OHLC and globex OHLC on the S&P so that I know the hi/los from the previous few days. I work out the fib numbers for the most recent major move, which you can usually see in the daily chart, work out the floor traders pivot points based on the previous days action. So with all these numbers, plus knowledge of intraday trendlines and important MA whereabouts (e.g. 1min 100 MA) I watch the action in the 1min chart for signs of exhaustion around these numbers and/or trendlines and cover when I think thats it.

2. In shorter trades where you have an aim of making say 2pts with a 1pt risk per trade, as soon as your in profit 1pt move your stop to breakeven, when at 2pts move the stop up 1pt, lastly cover at 2pts. If you have multiple contracts in play then you can cover them in stages. If the trade is obviously steaming ahead just move the stop to lock in your 2pts when you can then use method 1 on the rest. For scalps you might not have time to use stops.

3. If you have a multicontract in play try exiting 1/3 on a trailing stop, another 1/3 on a MA crossover, then the last 1/3 on an oscilator signal.

I think method 1 gets the most out, but number 3 is at lot easier to do.

HTH

Nick

 

[Riz]

It depends on the market mood on the day for me... I treat trending, volatile or whipsaw days differently for exits, thats for intraday trades, having said that I may still apply various strategies say on 2 different trending days depending on my position size, time of the day, my circumstances, the reasons for the entry, etc... barring all these sup/res levels are the ones I use most often... over all the reasons for the entry should give us the best clues as to when to exit... though trailing stops are best, they might stop you on a longer time winning position as you said, so I do sometimes ignore trailing if my reasons for the entry still intact

Riz

 

[ivorm]

Hi guys,

Thanks to everyone for your replies. Seems like there's no one certain answer to this, but you've all given me ideas to think about.

JonnyT : You mention you use profit targets, but how do you set them ? Is it just a matter of choosing a number and saying, for example, I'll close out when I hit 100 points of profit ?

FTSE Beater : I didn't understand what you meant by your third point (Alan Farley's method). Could you explain a little more, please (if u have the time).


Just to give you an idea about how bad my strategy is :

I went short on the DAX yesterday, and left my position on overnight with a stop at 3030 (the DAX closed at 2993).

I thought that was a pretty wide stop, but guess what. The pirce spiked up first thing this morning, my stop got hit, and then the price plummeted. Currently it's 2938 !!!

Do I feel bitter --- nahhhhhhhh !!!!!!

 

[FTSE Beater]

FTSE Beater : I didn't understand what you meant by your third point (Alan Farley's method). Could you explain a little more, please

Hi Ivorm

It's the method that Alan Farley teaches, which requires great skill and practise. http://www.hardrightedge.com/tw.htm This has an exit strategy section.

The way I interpret it is that a trend should go at a logical angle, to flat and it isn't worth trading. Too steep and it's the last expansion before the buyers run out and the price falls over itself. Well if the latter happens, then you get out on the way up (which is backward thinking). What it means is, you get out before everyone else figures out whats happened. This is a timing skill that may take years to get right.

Having had a look at the Dax this morning - In a word DAMN!!! That thing had one mean jump. I would put that down to just one of those things

 

[RogerM]

Ivorm - when I hold overnight I widen the stop very significantly to a level which is a "catastrophe" stop - i.e. one that is only there in case I drop dead or I wake up after a nuke has gone off in Tel Aviv rather than where i plan to cut my losses. This should be clear of any initial spike (up or down) and I then watch carefully following the open and try to resist the temptation to react during the first half hour - although with one eye on what has happened in the US overnight (or in the case of the US - what the futures have been doing). Once the market has settled down I'll bring the stop back up/down to a more realistic level. I've found this method works well for me in preventing stops being triggered by initial opening volatility and will very often leave the position to go into profit.

 

[ChartMan]

Brings us full circle back to the question " can the MM's see the stops and take them out".....

 

[options]

Answer has to be yes, doesn't it. Or rather they know where people place them.

share/index end the day down overall and in the last half hour. Market closes and sell orders are backing up with stops placed.
Next day, by common sense it should carry on the same way. But we all know it doesn't. It spikes against trend to take out all the stops before reversing and going the way it should.

Al down to the mm's getting a bit of bonus money.

Options

 

[JonnyT]

Hi Ivor,

Profit targets come from observation and backtesting. For instance day trading the S&P I look for 2-4 points per trade.

Swing trading the Dow I look for 150pts

JonnyT

 

[razorgirl]

FTSE Beater, I was interested in what you said about exits when a trend is too steep. When I'm day trading equities I use a trailing stop based on the 5 minute chart, but when the trend goes vertical I use Level 2 to time my exit. With practice it's possible to spot when the move is running out fo steam. But my rationale is risk/reward - the chart stop having to be so far away that I risk giving too much profit back - hadn't read the Farley stuff.

 

[ivorm]

Thanks again ppl for your replies and comments.

FTSE Beater : thnx for the link. It looks interesting - I'm gonna have a longer look at the site today.

Chartman & options : There's no doubt in my mind that the MMs know where the stops are - and go for them. But, it's just part of the game and something else for us to consider in the never-ending struggle to outwit them !

Just in case anyone's interested, I was long overnight on the DAX and followed RogerM's advice and set a very wide 'catasrophe' stop. I didn't get stopped out and so I'm still in my position.

On another note - I know it's often been said on these boards, but I still want to chime in and say what a great site this is. Many thanks to the ppl doing the hard work in keeping it going (Sharkey, Chartman, etc ) and to all the members who contribute with their expertise and opinions.

 

[Naz]

"Can the market makers see the stops and take them out?"

"Or rather they know where people place them."

Interesting comments.I believe they understand where people place them.I watch them day after day and see them taking the opposite view to the public.Lets face it if the public want to sell then someone has to buy and if its the ax,the controling market maker,he at the end of the day will be the winner.

Some of the best trades are when we break an important level on a chart and the public dump their stock like crazy and you see the ax buying it all up.Thats my entry,guess what, other level 2 players will see it as well and start buying the stock.Next move, you guessed it is up.

 

[NickW]

This might be a dumbo question - but why do the marketmakers take out stops?

I can understand the point of hitting sell stops below a support line in order to fuel downward momentum and get a sell off going, but why hit all the sell stops only to then reverse and strongly bounce up from the support level. I hate those sneaky peaks!

 

[Skimbleshanks]

By taking out a stop, you are forcing someone to sell at what is probably the lowest price of the day - the price then zooms up, and the stock is then offloaded at a higher price. So it's a quick and easy way to make money out of punters.

The majority of punters put their stops in such an obvious place that it is almost asking to be taken out. As I've said before, the placing of stops is an art - know where to put them and you are well on the way to riding the trends with the MMs and big boys.

 

[mooms]

NickW,

Breaking of support attracts a lot market players generally. They normally come out of the woodwork for the event.

Who's come out at this time you might ask.

1. The person who holds the stock as a long.

2. The person who's covering a short and taking his profits.

3. The potential shorter who's arrived late and wants to short the stock as it has worked for the last 3 days.

4. Fresh buyers.

When stops are hit below support its normally 1 & 3 selling there stock to 2, who is locking into profit.

If the stock regains the support line this will normally bring in 4, The person who owns the stock stops selling ie selling pressure reduces and enough buyers,trapped late shorts all adds to a violent up thrust.

 

[kinglatfan]

If I sell at a profit I simply don`t look back, just look for the next buy.



If I sell at a loss I simply look for the next buying opportunity.

If I do otherwise I just get bitter.

It is never a crime to take a profit. But perhaps it is a crime to let a losing position move beyond your original stop loss.

If I have truly mastered the ability to trade without fear then what happens after I have sold is of absolutely no consequence.

 

[shoee62]

Hi - reading the posts, as everyone says there is no perfect way, just getting a portion of the move is great.

I've traded the Dax and Eurostox for 3 years and reference to targets, I think a fixed amount in points doesn't work.

What seems to work for me is during a trend move measuring "swing" size. A basic example this morning is the opening move in the Dax from 2651 to 2601 ie 50 points, the market then backed and filled to 2625 before breaking down and doing another 50 point swing from the swing high of 25 down to actual low of 2572.5.
It takes some spotting and getting used to, but it seems to work well across the time frames.

best of luck