|Often, entry points are overly emphasized; as such, exits, which may be more critical to overall trading success than entries, are sometimes overlooked. This is because when you are contemplating an exit, you're already in the trade; the emotions of fear and greed make getting out of it more difficult. A missed entry is just one missed opportunity out of many, but a missed exit could easily result in a dramatically diminished trading account. Your exit strategy really has the toughest job. Every day, it has to make the critical decision: stay in or get out. |
WHAT SHOULD EXIT STRATEGIES DO?
An ideal exit strategy should exercise strict control over losses while allowing profitable trades to blossom. It should control your risk by quickly exiting from losing trades, but allow winners to mature. It will turn a losing system into a profitable one and can make a profitable system even more so: Your exit strategy will determine whether your system is a winner.
As stated above, a good exit strategy must allow for the:
The most comprehensive exit strategy is one that uses multiple types of exits, which are fitted to the current market environment and your risk tolerance.
DIFFERENT EXIT TYPES
There are many ways to determine where to place such stops, but in the final analysis the simplest is to specify the maximum amount you are willing to risk on any given trade. This can be tricky: If you have a very tight stop, you will be stopped out too often, but if the stop is too loose, you will bear unnecessary incremental loss.
Failing to exit at the appropriate time keeps you exposed to the uncertainties of market risk, and that can end up being costly. However, determining the precise moment of exit can be a real challenge. Exiting too quickly risks leaving too much on the table. Staying too long poses the problem of profits becoming losses. Therefore, prior to entering a trade, you should decide when to exit the position using any one of a number of exit strategies. Once you decide when to make that exit, your next challenge is to adhere to your plan.
R.M. Sidewitz is chief executive officer and founder of Qi2 Technologies, LLC, an investment management company, and the managing member of Qi2 Partners LP, a domestic hedge fund. His website is www.cybrlink.com.
Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.
|Company:||Qi2 Technologies LLC|
|Address:||4800 Baseline Road, Suites E104-370|
|Boulder, CO 80303|
Traders' Resource Links