Tag Archives: Exit Strategy

Improving Exits & Win Loss Size Ratio

Question:

Hi Lance,

The exit strategy videos have really been an eye opener for me. Must say it is the best exit strategy tutorial I ever came upon. A big thank you to you.

This single aspect has been what I now identify to be the only problem for my trading. I realise that my win/loss ratio is about 60% success, I realise that my stop loss sizes (which are dictated by price action) are bigger than my targets therefore contributing to my account reducing. Can you please give me an exit plan to solve this?

 

Answer:

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How Do You Know When To Exit

Trader Q&A…

Question:

Hi Lance,

It was by pure chance that I found your site through you tube, but am I glad I did!! Good sound advice which if you take it, works.

There is just one thing that always puzzles me and I hope you can help me with this. I have been looking at your articles on “Support and Resistance” with great interest and find them excellent info but I can’t work out where to exit. I open the trade and it goes in the right direction, I set my stop tight, watch it rise and then turn…Is this my exit point? I really do have difficulty with exiting, not that I won’t, I don’t really know when.

If this has already been covered on your site please accept my apologies as I have only just found it and I am ploughing through it with great interest.

Keep up the good work Lance

Kindest regards

K

 

Answer:

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The Importance of Exit Strategy – Video Series

The Importance of Exit Strategy – Part 3

Welcome back. Based on the information we discussed in parts 1 and 2 of this series; let’s now discuss my personal approach to exit management for short-term intraday trades.

The best way to do this is to first consider, what is my goal from trading, how do my chosen markets move, and what psychological needs do I have to satisfy with regards my trade management and exits.

Firstly, what am I trying to achieve with my daytrading?

My ultimate goal is consistent income. I am not swinging for the big home run trades. If I get one, that’s great, but it’s not the goal.

I trade for income. I accept that not every day will end in profit, but I do aim for each week to end profitably, and certainly every month. So, I can’t wait around for the big moves. I trade the small swings, and I look for consistent income.

So, in developing my exit strategy, we need to consider a requirement for consistent income. This means that both a high percentage of winning trades, and tight risk control, are important factors in the design of my exit strategy. To some degree, traders often see these requirements as mutually exclusive. While a higher percentage of winning trades is often achieved by widening stops, this is not possible in my circumstances, where I need to also keep risk as low as possible. I am satisfied though that the nature of my preferred setups, being at areas of support and resistance, generally ensure a higher probability entry. As such, my stops can be placed as tight as market action allows. In addition, in order to minimize risk, no trade can ever be allowed to place my trading career at risk. The average win/loss ratio must be kept under control such that an average loss is easily overcome by one average win. And any individual loss should never be such that it cannot be overcome by one profitable days trading.

How do my markets move?

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The Importance of Exit Strategy – Part 2

In part one of this article, we considered a few questions:

  • Should we use a tight stop loss to cut any losses quickly, or a wide stop loss to allow some room to move?
  • How quickly should we move the stop loss to breakeven?
  • Should we take profits at a target, or should we let the profits run, perhaps trailing a stop behind the price?

 

In attempting to answer these questions we looked at a number of charts, we chose an entry criteria, and then looked at possible options for the exit.

And this is what we discovered:

  • Firstly, in each case, the profit or loss taken out of the trade was more a result of our chosen stop and exit method, not our entry. For the same entry, there were numerous possible exits, some profitable, some breakeven and some at a loss.
  • And secondly, we cannot know, except with hindsight, what will be the most profitable exit strategy for that particular trade.

 

In other words – the exit is more important than the entry. The exit has more bearing on whether the trade ends in profit, or in loss. But there can be no perfect exit strategy that best manages every trade.

Sometimes we are better off with a wide stop. Sometimes we are better off with a tight stop. And for ongoing management of the trade, sometimes in hindsight the best results would have come from exiting a target price. Other times the best results come from trailing a stop.

So what’s a trader to do?

In this part of the article, I’d like to discuss the some of the principles or personal beliefs that I used in formulating an exit plan. Coming up then in part three, we’ll examine my exit strategy, and share some advice from great authors and traders who have shaped my current beliefs regarding exits.

As always, don’t believe a word I say. This is simply what works for me, based on some of my market beliefs. I’m serious – you need to test everything. If what works for me contradicts or is incompatible with your style of trading, then it probably won’t work for you, either technically or psychologically. By all means try it. But journal your trading results, and review them to learn your lessons, retain what works, and discard or improve what’s not working.

Enough of that – let’s get onto exits.

 

BELIEF #1 – Fixed rules don’t work

At least none that I know of!

I am assuming from some of the email feedback I received over the last week, that people were hoping I was going to present the ‘holy grail’ exit rule, along the lines of:

  • “If the standard deviation of the 14 period average true range (ATR) is less than 2/3 of π times the 3 period ATR, then set the stop at 1.8 ATR, else 2.5 ATR. Now set your stop and walk away.”

 

Sorry folks, that’s not how I work. And I’m really sorry if that disappoints you. By all means, test that last rule, but do not trade with it because I really did just make it up. The fact is that I don’t know of any objective rule like this that you can apply to ensure you get the best type of exit each time. As we discovered in part one, you CANNOT know which exit would have worked the best, until the trade is history. The good news though is that you don’t need a fixed rule like this.

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The Importance of Exit Strategy – Part 1

I was chatting to another trader this morning about exits, and thought it might be time to share my understanding of ‘the basics’ of exit strategy and exit management.

It really is an area of trading that gets very little attention compared to the other end of the trade – the entry. Go into any forex trading forum and you’ll find thread after thread talking about the latest entry method, but very few threads having an intelligent discussion on exits.

It is my belief that your success in trading has more to do with how you exit your trades, than it does with your entry.

Now, in discussing risk management today, we’re not going to consider the use of defined-risk options strategies. I believe they’re a great technique for risk management in a swing trading or position trading timeframe, but that’s perhaps a subject for future articles or videos.

For now, let’s consider standard stop loss placement and exit management.

So, what’s best?

  • Should we use a tight stop loss to cut any losses quickly, or a wide stop loss to allow some room to move?
  • How quickly should we move the stop loss to breakeven?
  • Should we take profits at a target, or should we let the profits run, perhaps trailing a stop behind the price?

 

Let’s look at some example charts, from the GBP/USD five minute timeframe, although the principles are the same for any market and any timeframe.

In Figure 1 below, let’s assume our setup was the moving average cross, and we entered long at the open of the candle after the first green candle. The entry point is marked at 1.9727. At tight stop might be at the point marked S/L 1, just below the green candle. A wider stop might be at position S/L 2, below the recent swing low, and the 1.9700 level. So, is this a good trade? Well, really our profit and loss depends on how we manage our trade and where we exit.

If we took profit at the 1.9750 level, marked as A, due to expectation of a pause at that round number level, then we had a good trade. If we moved the stop loss to breakeven from either S/L 1 or 2 on the initial rally, and got stopped out at position B, then I guess that’s a good trade as well, although we have no profits to show for our work. If we hadn’t moved our stop loss to breakeven though, we had another opportunity at C for an exit at the 1.9750 level when price stalled there a second time. Once again, a good exit in hindsight. If we didn’t take that though, because maybe we’ve heard that it’s best to always let profits run and to trail stops below the swing lows, then maybe we were stopped out at D for a couple of pips loss, as price broke below the lows of B. This is not a great result at all, but at least the loss is small. It’s certainly better than the larger loss (after having been in profit for quite a while) that occurs when stopped out at point E, as price hits S/L 1, or at point F as price hits S/L 2.

And of course, in this case if you’d acted out of fear and failed to exit at S/L 2, and held onto your trade hoping, wishing and praying for the market to turn around, you’ve been rewarded, as an economic news release turns the market and moves it in your favor to much higher profits. And the market actually went quite a bit higher than this.

 

exit strategy

Figure 1

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