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:

Hi Steve,

Thanks for your email and your feedback on the exit strategy videos. I’m glad you found them to be useful.

If I understand right, your win percentage is good but your win loss size ratio is poor (average win less than average loss), leading to a negative expectancy. You asked if I could give you an exit strategy to solve this problem. Unfortunately not, as I have no background to your strategy, your setups, your entry and management methodologies, your testing with regards different exit styles, and your psychological ability to withstand risk of loss and to hold profits till the planned exit point.

Learning to manage our exits is in my opinion one of the toughest parts of becoming a trader. As the videos stated, you cannot know the optimal exit technique for any particular trade until after that trade has been completed. Quite likely, exits will be an area of your trading that you will never be fully satisfied with. I know I’m not.

So, unfortunately there’s not a ‘cookie cutter’ solution that can be applied to anyone’s strategy which suddenly optimizes their exits.

Hopefully though, I can provide some guidance which will help you to develop your own solution.

Typically a less than ideal win loss size ratio results from either:

  • poor quality setups which do not actually offer a greater probability of moving to your desired targets; or
  • taking profits too soon, most often due to the psychological challenge of holding until the target is hit.

 

Developing your preferred exit strategy will simply take lots of testing on your part, and experiencing different exit options in the market, until you find something that is reasonably comfortable while still providing a positive expectancy.

Some questions to consider (this is not an exhaustive list – just what comes immediately to mind):

  • How well do you actually understand your setups? Given that the only way we can profit in the markets is if other people make the same trading decision that we make, after we’ve made it, have you considered whether or not your setup actually does provide an edge? In what way does the market movement associated with your setup encourage others to trade in the direction of your trade?
  • Have you tested alternative entry techniques. Bo Yoder in one of his books (I think it was Optimizing the Edge???) talks about one of his clients, in which he found that if they entered at market immediately on identifying a setup, rather than then waiting for a trigger entry on a breakout of the setup bar, they increased their edge considerably. This change actually reduced their win %, but increased their win loss size ratio by a greater amount, resulting in increased profits overall. Perhaps your problem is not in exits, but in seeking too much confirmation on entry? Have you considered this at all? So, test alternative entry techniques. Every change you make will lead to a tradeoff between win loss size ratio and win%, but maybe this will lead to an answer.
  • Are your exits mechanical or discretionary? If discretionary, does your testing lead to positive results while your live trading fails to live up to expectations? (Backtesting doesn’t count – it needs to be proven positive results from forward testing). This may indicate some psychological challenges, in ability to hold through the ‘uncertainty’ of price action as it moves towards your preplanned exits. Check out books by Mark Douglas and Brett Steenbarger for some insights into dealing with the psych challenges.
  • Have you tested different exit techniques? How do 1R targets, compare with price action based targets? How does a trailing stop compare with the different price targets? How do discretionary exits compare with a completely hands-off  approach, walking away from the trade after entry allowing it to hit either its stop or target? How does an all-in all-out approach compare with scaling in and/or out?

As you can see, finding what works for you is simply a case of lots of experimentation and testing. Be sure to do this in a demo/simulation environment. There is no easy answer – it doesn’t exist. Hopefully the above questions can give you a starting point though in developing your exit strategy.

Cheers,

Lance Beggs

 


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YourTradingCoach – Admin

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