Exiting a trade

Ashsaege · 27 July 2009

When should one exit a trade?

I've learned the hard way of the importance of stop losses, position sizing, and risk management - and i strongly implement these now in my trading.

But I find it frustrating when I'm well in front on a trade, only to have it come back down to break-even or even a small loss and then it is exited by my stop loss.

What does everyone else do? Trailing stops? bank those small profits?

When you are well in front, what do you feel most comfortable in doing?

beamstas · 27 July 2009

There is more than one way to skin a cat

Ashsaege · 27 July 2009

beamstas said:
There is more than one way to skin a cat

Im sure there is more than one way to milk a moose.

Timmy · 27 July 2009

Cat skinning / moose milking. Part 1.

Do you continue to evaluate the trade once it starts moving in your direction, looking for indications it may be changing behaviour etc.?
If the indications are, on the other hand, that it should continue to rise, is it doing a good job of continuation?
Someone posted recently, too, that if you start getting euphoric about the extent of the price rise then its time to exit.

Hope these ideas help.

Ardyne · 27 July 2009

Everybody will have their own method. Either indicators such as MACD or STO changes. Maybe join the swing highs and the swing lows with trend lines and wait for them to be broken. Read lots of websites and see what people do and work out what suits you. If in doubt I work out what the return is on my risk. If Ive risked say $100 on a trade and its up $300.00 and I'm not sure what to do next I get out because to me thats a good return on my money.

good luck

Ashsaege · 27 July 2009

Timmy said:
Cat skinning / moose milking. Part 1.

Do you continue to evaluate the trade once it starts moving in your direction, looking for indications it may be changing behaviour etc.?
If the indications are, on the other hand, that it should continue to rise, is it doing a good job of continuation?
Someone posted recently, too, that if you start getting euphoric about the extent of the price rise then its time to exit.

Hope these ideas help.

I do continue to evaluate the trade once it is moving in my direction. I mainly use support and resistance levels, moving day average, and volume. I don't use complex technical analysis - keep it simple i reckon.

Mr J · 27 July 2009

When you are well in front, what do you feel most comfortable in doing?

Comfort is related to emotion, and emotions have nothing to do with my trading. I trade to maximise profit, and am flexible about how I manage trades. I do move stops up reasonably aggressively, but those has more to do with the fact that I make quick trades, and that positions can turn quickly.

beamstas · 27 July 2009

I tend to use the same method for every trade
This way it's simple and you don't have to make judgement calls.

You can also test your exit criterea through a series of random entries using Amibroker, to determine whether your risk management is giving you positive results or not.

For example, the exit criterea currently sitting in a mechanical system im coding returns 20%+ from 2003 to 2009 p.a, using random entries on random stocks at random times. To me, this proves that my risk management model will take care of any judgement calls that have to be made in the future, while managing my risk.

If you are returning a negative result with random entries and a positve result with your defined entries, it probably means that you have curve fitted an entry point that fits the backtested data, and probably won't stand up in unknown future market conditions.

Your risk management should always keep you better than break even. It should cut off losing trades fast but allow the winners to keep going.

If you'd like me to test some ideas that you have over historical data, drop me a private message or email and i'll see if we can arrange something.

Regards
Brad

Wysiwyg · 27 July 2009

Ashsaege said:
But I find it frustrating when I'm well in front on a trade, only to have it come back down to break-even or even a small loss and then it is exited by my stop loss.

When you are well in front, what do you feel most comfortable in doing?

You could sell a percentage of your holdings "when you are well in front" and leave the rest at break even or above.

thanks to tech/a.

AlterEgo · 28 July 2009

Wysiwyg said:
You could sell a percentage of your holdings "when you are well in front" and leave the rest at break even or above.

thanks to tech/a.

Interestingly, I’m just reading “Trade your Way to Financial Freedom” by Van K. Tharp, and he advises against doing this.

Quote:
“There is one kind of exit that is designed to get rid of losses, but it totally goes against the golden rule of trading of cut your losses short and let your profit run. Instead, it produces large losses and small profits. This type of exit is one in which you enter the market with multiple contracts and then scale out with various exits.”

“Short-term traders use this type of strategy frequently. On a gut level, this sort of trading makes sense because you seem to be “insuring” your profits. But if you step back from this sort of exit and really study it, you’ll see how dangerous this type of trading is.”

“What you are actually doing with this sort of exit is practicing reverse position sizing. You are making sure that you will have multiple positions when you take your largest losses. ...... You are also making sure that you only have a minimal-sized position when you make your largest gain. ...... It’s the perfect method for people with a strong bias to be right, but it doesn’t optimize profits or even guarantee profits.”

“If it doesn’t make sense to you why you should avoid this sort of trading, work out the numbers. Imagine that you only take either a full loss or a full profit. Look at your past trades and determine how much of a difference this sort of trading would have made. In almost every instance when I’ve asked clients to do this, they become totally amazed at how much money they would have made holdig on to a full position.”

Ashsaege · 28 July 2009

AlterEgo said:
Interestingly, I’m just reading “Trade your Way to Financial Freedom” by Van K. Tharp, and he advises against doing this.

Quote:
“There is one kind of exit that is designed to get rid of losses, but it totally goes against the golden rule of trading of cut your losses short and let your profit run. Instead, it produces large losses and small profits. This type of exit is one in which you enter the market with multiple contracts and then scale out with various exits.”

“Short-term traders use this type of strategy frequently. On a gut level, this sort of trading makes sense because you seem to be “insuring” your profits. But if you step back from this sort of exit and really study it, you’ll see how dangerous this type of trading is.”

“What you are actually doing with this sort of exit is practicing reverse position sizing. You are making sure that you will have multiple positions when you take your largest losses. ...... You are also making sure that you only have a minimal-sized position when you make your largest gain. ...... It’s the perfect method for people with a strong bias to be right, but it doesn’t optimize profits or even guarantee profits.”

“If it doesn’t make sense to you why you should avoid this sort of trading, work out the numbers. Imagine that you only take either a full loss or a full profit. Look at your past trades and determine how much of a difference this sort of trading would have made. In almost every instance when I’ve asked clients to do this, they become totally amazed at how much money they would have made holding on to a full position.”

That's a great post.

When i first started, i would add to my position if the stock would drop, so i would accumulate while it was 'cheap'... I learned my lesson!! never again.

Now i only ever add to a position when a stock heads north.

Wysiwyg · 28 July 2009

AlterEgo said:
Interestingly, I’m just reading “Trade your Way to Financial Freedom” by Van K. Tharp, and he advises against doing this.

Hi alterego, what page is that on please? thanks.

In reference to the Tharp quote ... he mentions "multiple" contracts and scaling out. This is not what I am referring to in the context of the thread. The initial risk % of capital still applies.

Mr J · 28 July 2009

AlterEgo, he's only addressing the negative side of scaling out and doesn't address the flipside. While scaling out could harm one's profit potential, scaling out can improve it if it leads to someone keeping some of the position open when they would otherwise close all of it.

Mathematically, scaling out can also make sense. The greater the move, the more likely that the market will retrace, the smaller the edge becomes, and therefore the position size should be decreased. Thoughts?

AlterEgo · 28 July 2009

Wysiwyg said:
Hi alterego, what page is that on please? thanks.

In reference to the Tharp quote ... he mentions "multiple" contracts and scaling out. This is not what I am referring to in the context of the thread. The initial risk % of capital still applies.

Page 265

Yes, his example of multiple contracts is slightly different to what you're referring to, however I still believe it applies. You are saying to exit a portion of your position at some arbitrary point, and leaving the remainder to run until your trailing stop is hit (or whatever your exit criteria is). Van Tharp is suggesting that you will be far better off letting your entire position run until your system indicates an exit. eg. If you sell half your position at say a 3R profit and let the remainder run, then when you get a really big winner, like say a 20R profit trade, you’ll only have half your position on it. What you’re suggesting is really the reverse of pyramiding.

Wysiwyg · 28 July 2009

AlterEgo said:
Page 265

Thanks matey, I have much respect for Tharp.

Mr J · 28 July 2009

AlterEgo said:
Van Tharp is suggesting that you will be far better off letting your entire position run until your system indicates an exit.

Shouldn't that be a given? We should be exiting a trade (or at least part of it) for a reason, not simply to lock in some profit for the sake of it. Perhaps his problem with scaling out isn't because scaling out is bad, but because it is probably poorly done, so he advises people to stay clear of it as a solution.

AlterEgo · 28 July 2009

Mr J said:
AlterEgo, he's only addressing the negative side of scaling out and doesn't address the flipside. While scaling out could harm one's profit potential, scaling out can improve it if it leads to someone keeping some of the position open when they would otherwise close all of it.

On what basis would they close all of it? Based of the system indicatiing an exit, or exiting based on 'gut feel' that the price is too high?

Mr J said:
Mathematically, scaling out can also make sense. The greater the move, the more likely that the market will retrace, the smaller the edge becomes, and therefore the position size should be decreased. Thoughts?

That may depend on what type of system you are using. If you're using a mean reversion type system, then there could be something in what you say, although I have no experience in that type of trading so can't really comment.

Successful trend-following type traders though, tend to do just the opposite - scale UP, rather than DOWN, so that they get the maximum out of their largest winners.

AlterEgo · 28 July 2009

Mr J said:
Shouldn't that be a given? We should be exiting a trade (or at least part of it) for a reason, not simply to lock in some profit for the sake of it.

I agree.

MRC & Co · 28 July 2009

AlterEgo said:
“Short-term traders use this type of strategy frequently. On a gut level, this sort of trading makes sense because you seem to be “insuring” your profits. But if you step back from this sort of exit and really study it, you’ll see how dangerous this type of trading is.”

Is Van Tharp actually a good trader?

I'm just not sure because the vast majority of good traders I've ever met have a 'gut feel' (it's basically just reading the tape or the underlying psychology) and do scale.

My opinion is many mechanical traders and their rules sometimes makes them miss the simple things.

Timmy · 28 July 2009

MRC & Co said:
Is Van Tharp actually a good trader?

I'm just not sure because the vast majority of good traders I've ever met have a 'gut feel' (it's basically just reading the tape or the underlying psychology) and do scale.

My opinion is many mechanical traders and their rules sometimes makes them miss the simple things.

Here you go, MRC. You might want to put this on.

Exiting a trade

Ashsaege

beamstas

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