A little early today. With CPI due out and the volatility up, I may not get a chance later.
Today I want to talk about exit strategies. Now every newbie will tell you (he may not do it, but you can bet, he’s heard it) that every entry needs to be accompanied by a stop loss. Like most things in trading this is not all it seems to be. Indeed, some fund managers, Ken Fisher, for example, argue against it.
So what is the truth?
One thing is certain, every successful trader/investor I know, and know off, has an exit strategy. If your exit strategy is based on what you can lose, then, you probably won’t be taken out of the game by one loss but you will probably bleed to death. The fact is the market doesn’t care what you can or cannot afford to lose. And as far as stop placement is concerned, neither should you.
First determine what the market has to look like for your trade to be wrong and then work out if you can afford the loss. If you can’t afford the loss, cut down your size. If that still doesn’t do it, by-pass the trade. Willy-nilly placing a stop loss, is just asking the market to take your money.
My exit strategies involve:
- Price stops: at this price my trade is wrong and it’s a price beyond which I won’t hold a position no matter what.
- Contextual (strategic stops) exits: what does the market have to look like for me to exit a trade? What does it have to look like for me to remain in the trade? The answers are dependent on the type of setup that got me into the trade. If it’s a Negative Development setup, the market has to prove the trade right after a set time after entry. I seldom extend the time to exit – though I often exit ahead of time. If it’s a Contraction setup, I am more forgiving as far as holding onto a position that is not moving.
- Time stops: both Negative Development and Contraction have a time stop.
On Monday, I’ll look at strategies for taking profits.