Help with exit strategy

[megamuel]

OK, so... Working on my swing trading strategy which I'm hoping to put into action early next year. I've got my entry criteria, I know where to put my initial stop loss and I know how to calculate my trade size (2% of capital divided by number of points between entry and stop loss). Now I need to know how to exit a profitable trade (wishfull thinking!!!). I know there is no straight forward answer to this, I'm just after some guidance... So (I think) I have 3 options:

1. Wait for the reason the trade was entered to change and exit. E.g. Stochastic is one of the indicators I am using, if short trade is entered when overbought, wait until oversold to exit. PRO - Easy to know when to exit. CON - Oscillators are not accurate and do not predict future price action, might miss some profit.

2. Set a limit order at 2 or 3 times the risk. PRO - Can be done when trade is enetered and means that continual monitoring will not be required, simply wait for one of the orders to be hit. CON - As with #1 the trade could potentially go to more than 3x risk!

3. Use a trailing stop or manually adjust stop as trade becomes more profitable. PRO - could potentially catch large profits from trades that go to many times the size of the inital risk. CONS - Constant monitoring of all trades would be necessary and stop adjusted accordingly... Price could come down hit stop if too tight and then go off into profit or if a looser stop was used, some potential profit could be lost if trend reverses.

Any thoughts/guidance would be much appreciated. Thought I saw a similar thread a while back but could not find it. Thanks all, hope everyone is well.

Sam.

 

[tomorton]

Hi Sam -

Some initial thoughts, though I'm no expert on optimum exits -

1. exits based on indicators almost aways incur time-lag, as do entries on same criteria (but in reverse). If you lag your entry and then lag your exit, likely to end up with a very thin gain if any.

2. Its is advisable to have greater reward than risk per trade (but not essential) but you can't just pluck a multiple out of the air that does not relate to the price action of the instrument you're trading. You might be prepared to risk 1000pts on a FTSE100 long, but why would the FTSE100 go up 3000pts just to suit your formula?

3. Do use a stop and never move it wider. For me, a fixed stop is acceptable as long as I also have a limit order on the other side. It matters not which is hit on any individual trade, as I know that more targets will be hit per year than stops, and the rewards are better than 1:1 with the risks.

Best method is to relate your stops and targets to the instrument to either take advantage of its regular volatility or to gain the protection of its significant support / resistance levels. Many good traders (not me) use ATR, which seems a rational way of doing it - let the market tell you where you can get out, avoid getting stopped out by noise and is not a subjective % level imposed on the market.

At present I am not knocking myself out to maximise profits, but I stay up into the small hours finding ways to minimise losses.

 

[megamuel]

Cheers Tomo!

Appreciate the reply mate. So first idea rubbish. Second idea ok if I can relate my target to price action. Third idea ok if I can adjust my stop losses to appropriate support/resistance levels?

At the moment I am leaning towards the second option. My reason for this being that for the third option there is a certain amount of discretion required when selecting areas of support and resistance, and unfortunately, I am very emotionally unstable! I feel that fear, greed, panick etc. would affect me much more than your average trader and therefore there would be much more chance of me messing up. We all know how much psychology is involved in discretional trading systems... Hence, me trying to make my strategy as mechanical as possible even if it means missing some profit.

So, tomorton, do you always use a limit order? Could you (or anyone else who used limit orders) give me some pointers on how to calculate an appropriate target to place a limit order at. I see your point about not plucking a multiple out of the air for the limit order, but if my initial stop loss always relates to price action would it then be ok to pick a multiple of the size of the stop loss, depending on which would give the best rewards? Does that make sense?

Thanks again,

Sam.

 

[tomorton]

Hi Sam -

Do I always use a limit order?
I nearly always do use a limit order but sometimes it is unrelated to price action - its just a level way way ahead of the price that I hope the SB quote might hit if the price spikes unexpectedly: I have seen orders taken by the SB system with a speed that would be impossible manually.

Does a r:r multiple based on stop-loss make sense?
No.
The market won't behave a certain way because you have a stop-loss of Xpts, even if that stop is just beyond recent market ranges or s/r so that would only be hit if it really was going in that direction, not just oscillating, making 'noise'. Your multiple has to be based on projected market behaviolur.

In my favourite system, I have actually gone over intraday charts for several months to see what gain or loss suits the price action on the FTSE, using the system's entry signal. It turns out 2% is the optimum. If I set a 2% stop a dn a 2% limit order, one or the other is hit more often than not inside the day's range after entry, and more often then not it is the limit order, not the stop. The limit is the same as the stop 2%, but if I have the chance because I am watching price movement (I can't always screen-watch because of work commitments), I will push the limit ahead, to get >+2%, but never much, I don't need to, I'm going to make my profit target anyway. I often trail the stop, still at 2%, behind best price achieved also.

I have tried to raise the reward to more 3% or 4% to get r:r multiples of just 1.5 or 2.0, not terribly ambitious, but all that happens is that the market fails to reach these better levels and hits either the 2% stop or 2% trailed stop.

You will see here the multiple is therefore typically only 1x. On this system that doesn't matter as W:L stays better than 50% (I would never run a system that was W:L <50%, regardless of r:r). I think many otherwise good traders re-iterate that their system's r:r multiple must be 2x or 3x merely because they don't know what their market truly generates when their system is applied. That is just hope entering the trading equation in the form of a multiple and is not acceptable.

Study your system applied to your market and let price action tell you the W:L and r:r multiple. Don't force it. Apply a little zen and let the market tell you. If you're >50% W:L and 1 or more r:r you have the basis to be profitable. If r:r is <1, regardless of W/L% you'd probably want to move on, I would. But don't forget that markets change and you have to keep monitoring to ensure these ratios remain valid.

 

[megamuel]

So I need to look at historical data and determine which combination of r:r and subsequently W:L will give me optimum results? How would I go about doing this? Thanks,

Sam.

 

[tomorton]

I only know the manual way - take the historical charts for your market, identify the entry points for your system and then basically roleplay each position until it concludes, as either a win or a loss. Then vary one of your parameters and see how these positions would have ended. Then vary another, etc. But I think there are software packages that will do that for you, if somone on the site can recommend one.

 

[megamuel]

Cheers I'll try that. Thanks again for your help!!!

*Buys tomorton a virtual beer!*

Sam.

 

[theroguetrader]

THE most valuable tool in investment / trading is a " straight line "... !! :idea:
(and to think i hated tech-drawing at school) -

Why not cut back on the indicators - and follow the " PRICE ACTION "....?? and use that as your entry and exits ..??



(and yes i missed a " BIG " entry - i might have been " stuck " in tescos when that occurred ) -

 

[accendotraders]

To Stop or Not to Stop

I think the argument of lag indicators or price action is one to be held in another thread. What I wonder is if you're looking for a way to exit positions that doesnt require you to make a decision or take action. Trust me, I understand the want to remove all emotions. My emotion trading has cost me big time. What was important though, is that I learned from the mistakes and made adjustments to my trade plan and trading style.

Risk is a very interesting thing. It's different for all people. The same may be true for emotions. There is a reason why you still see star athletes out there shooting jump shots, taking hand offs, and batting practice (despite Allen Iversons "We're talking about Practice." The more you practice, the more you learn and hopefully the more real life situations become manageable because you've been there. The zone becomes reality.

Back to the question, I like using stops. I only make adjustments to my stops when the price graph tells me too. But that's also written out in my trade plan. The biggest key is pick who you are and be that person consistently. Secondly, if you dont know why you entered the trade and knowing the potential risk to reward ratio for the trade to begin with, why exactly are you making the trade. :?:

Build a plan and trade the plan.

 

[theroguetrader]

Risk

Do you believe you are taking a risk when you put on a trade ?

Have you accepted the " possible " consequences of your actions ?

A " yes " to BOTH questions is expected when you accept risk - this means youll be able to accept the consequences of your trades without " emotional Injury "... (whether its a fiver on a spread bet or a 1000 lot on the bund) -
If you dont accept the risk - you will do everything to avoid it - !!

When you " fully accept " the risk - You will be trading " free of emotions "....... !!!

 

[new_trader]

I think the argument of lag indicators or price action is one to be held in another thread. What I wonder is if you're looking for a way to exit positions that doesnt require you to make a decision or take action. Trust me, I understand the want to remove all emotions. My emotion trading has cost me big time. What was important though, is that I learned from the mistakes and made adjustments to my trade plan and trading style.

Risk is a very interesting thing. It's different for all people. The same may be true for emotions. There is a reason why you still see star athletes out there shooting jump shots, taking hand offs, and batting practice (despite Allen Iversons "We're talking about Practice." The more you practice, the more you learn and hopefully the more real life situations become manageable because you've been there. The zone becomes reality.

Back to the question, I like using stops. I only make adjustments to my stops when the price graph tells me too. But that's also written out in my trade plan. The biggest key is pick who you are and be that person consistently. Secondly, if you dont know why you entered the trade and knowing the potential risk to reward ratio for the trade to begin with, why exactly are you making the trade. :?:

Build a plan and trade the plan.

"The more you practice, the more you learn and hopefully the more real life situations become manageable because you've been there."

Well said, excellent post. There are no magic formulas or pretty coloured lines that will allow you to avoid this nasty process.

 

[megamuel]

Hi folks,

Thanks for the replies. I will be usuing price action to enter my trades, I am just using indicators to quickly search for trending stocks and reversals before using price action on a smaller time frame. Accendotraders, how did you get over the problem of your emotions affecting your trading? Do you use a mechanical system too or did you just keep practising until you were able to remove emotions? Do you use limit orders or just stop losses? And yes I understand the risks fully and I will take the necessary action to limit my risk, doesn't mean I will be emotionless if a trade fails though! Surely everyone is a bit disappointed when a trade fails and happy when a trade goes well.... Thanks again guys,

Sam.

 

[PokerBrat]

MegaMuel, there is no such thing as a perfect exit strategy, whichever one you use will work better in different scenarios. I recommend you read the three articles entitled The Importance of Exit Strategy on this site:

Articles-Risk-Management | Table

I do think you are missing something essential in your discussion above - support and resistance. Areas of support and resistance should determine your stops and profit targets. If you don't use support and resistance, you will have no idea of what to expect when the price moves and subsequently, no idea how to respond to it.

Once you know the areas of support and resistance, you can trail your stops at positions where they should not be hit by market noise, but will be hit if the price reverses.