What’s Your Exit Strategy?

The are tons of YouTube videos about the best entry signals for day trading.

However, I feel there is a relative lack of discussion with regards to exit signals.

Which is ironic, because someone once said that the exit strategy is far more important than the entry strategy, and I think that is absolutely true.

You don’t make a single cent from an entry strategy. The exit strategy is where your money is made.

Every exit strategy has its own pros and cons.

Let me try to summarize:

EXIT STRATEGY 1: “SET AND FORGET”

Description: Set a fixed stop-loss (e.g. 1x ATR) and take-profit target (e.g. 2x ATR) and don’t do anything else.

Pros:

  • Easy to manage. In fact, no management required at all.
  • Won’t get stopped-out prematurely (as compared to moving up your stop-loss midway through the trade).

Cons:

  • Potentially frustrating if price comes very close to hitting your profit-target but then it goes all the way down and you end up losing the trade instead.
  • Determining the optimum take-profit target is tricky. Is it 1.5x? Or 2x? Or 2.5x? A lot of backtesting is required to determine this.

EXIT STRATEGY 2: USING EXIT INDICATORS

Description: There are numerous indicators which can be used as an exit indicator, such as moving average lines, MACD, Parabolic SAR, Heikin Ashi bars, SSL Hybrid, Aroon, etc.

Pros:

  • Straightforward. No ambiguity.
  • Occasionally you may catch really huge moves.

Cons:

  • In my experience, you usually leave significant profits on the table, which can be frustrating. For example, your trade may have gone to 4x profit, but the exit indicator only gives the signal when it comes back down to 2x profit. Also, if the move is a small one, you may actually end up with no profit or even a small loss. Some people may not be able to take this.

EXIT STRATEGY 3: USING A TRAILING STOP-LOSS

Description: This method means you don’t set a profit-target at all. You just let the trailing stop-loss trail price all the way until it comes back down and triggers the trailing stop-loss.

Pros:

  • Easy to implement. No management required. Just let the trailing stop-loss do all the work for you.
  • You may catch really big moves.

Cons:

  • Determining the optimum trailing stop-loss value is a tricky problem. Too big, and you may end up with no profits if the move is a small one. Too small, and the trailing stop-loss may get triggered easily.
  • Similarly with using exit indicators, you may end up with no profit or even a small loss if the move is a small one.

EXIT STRATEGY 4: TAKING PARTIAL PROFITS

Description: Take off partial profits in tiers when price reaches specific checkpoints, e.g. cash out 25% when it hits 1x profit, cash out 25% when it hits 1.5x profit, and cash out all the remainder when it hits 2x profit.

Pros:

  • You are wisely putting some money in your pocket as your trade becomes more and more profitable.
  • Psychologically comforting. You know that even if the trade suddenly goes south, you already have some profits safely cashed out. You will be more willing to let the trade run until it hits your desired take-profit target.

Cons:

  • Tedious to manage, especially if you have multiple trades going on simultaneously.
  • You will collect less profits as compared to if you had waited till the final take-profit target to cash out 100%. For example, if you had a profit-target of 2x, you will collect more profits by cashing out 100% of your position at 2x, as compared to taking partial profits along the way.

Apart from the 4 strategies above, you could even do a hybrid strategy where you take partial profits in tiers, and then let the remainder trail with either an exit indicator or a trailing stop-loss.

I’ve spent countless hours pondering over what the best exit strategy for a trade is.

And the conclusion I’ve reached is that there is no one perfect exit strategy.

It depends on factors such as your personality, the style of trading you prefer, your risk appetite, the volatility and nature of the instrument you trade, etc.

If you’re the kind that likes to make your profits slowly, surely and steadily, then maybe Exit Strategy 4 might be best suited for you.

Personally, I don’t really like Exit Strategy 2 and 3 because I just don’t like seeing that I’ve only made 1x profit on a trade that had gone as high as 3x at one point. It just doesn’t sit well with me.

As such, at this point in my trading, and after trying out so many different types of exit strategies, I’m leaning towards Exit Strategy 1 (“Set and Forget”) because despite its simplicity, I actually find it’s one of the most suitable methods for me.

But of course, before you decide to adopt any kind of exit strategy, make sure you do a lot of backtesting first.

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