exit timing is the key to profits

Exits which take traders out closest to the achieved top of a trend move are more efficient than those techniques which surrender a larger proportion of the available potential profit.

The exit is the action that defines the success or failure of the trade. Many exits are distorted by the trader’s greed. Greed acts most dangerously in the exit. It is greed that keeps the trader in deteriorating trades - he hopes prices will climb back to old levels so he can exit. It is greed that keeps him in losing trades - hoping prices will climb back to break even after his stop loss has been passed.

Defining the exit conditions helps control greed. However, some exit techniques are more effective than others. Exit efficiency is a measure of how successful various techniques are when compared to the absolute high to the trading move. It is never possible to exit consistently at this high point, but it does provide a benchmark. The trader’s objective is to use the exit technique that has the best probability of consistently locking in the best return.

Every trader works in the same market, but the results are very different. Some traders have good profits while other traders have many losses. The reason for the difference is the method each trader uses and the psychology of every trader. When the method traders use is the same, the results are not the same. Aggressive traders will enter the trade before it is correctly confirmed. Cautious traders wait too long before they enter the trade, and they miss out on profits. Timid traders use a tight stop loss and they have an exit signal before the trade can fully develop.

These three features are related. When the trading method is simple it is easier to develop consistent trading and it is easier to continue to use good trading discipline. The falling market in 2008 tested trading discipline and consistency. The recent market has many short uptrend rallies followed by rapid downtrends. This is called ‘choppy’ market conditions. There are not any strong long term trends. In this market condition it is important to apply consistent and disciplined trading.

One of the most difficult activities in the market is taking profits. Many traders think it is easy to take profits but when it is time to exit the trade they find many excuses to stop them from acting. The main problem is greed. The trader looks at the highest price for the uptrend. He calculates how much profit he could have made if he had taken an exit at that price. Say $15,000. Then he looks at the current exit price for the stop loss trade plan. He calculates again how much profit he would have. Say $10,000.

There is a $5,000 difference in profit between the highest possible exit price in the trend and the current exit stop loss price. If he exits at the current price then it looks as if he has suffered a loss. He only has a $10,000 profit compared to a $15,000 profit if he had exited at the highest price in the trend.

Experienced traders know this is not a problem. They take the $10,000 profit and wait for the next trade to develop. Traders who do not have experience decide to wait for the price to rebound and move towards the previous price high in the trend. They want to wait for a better profit. They are greedy. In a bull market this strategy is often successful. In a bear market this strategy is not successful. In a market with a developing up trend recovery this strategy is often very dangerous.

The developing uptrend is often weak after a long term bear market. The price does not bounce upwards. It may continue to fall. The profit may fall from 10,000 to 5,000. Eventually the trader is disappointed and he sells for a small profit of 5,000 instead of a larger profit of 10,000. Their greed does not have a reward.

Sometimes the price does rebound and move towards the previous high price in the trend. The greedy traders do not sell. When the price rises they change their exit target. They move their exit price higher and higher. In a bear market recovery it is more difficult for the price to reach the new targets. The price retreats and develops a clear pattern that shows the end of the trend. The greedy trader does not recognise this pattern until it is too late. When it is time to sell he does not have exit discipline. Often he waits too long to exit and he misses out on the larger profit.

Good traders follow the trading plan. They are successful in ignoring greed. They concentrate on collecting frequent profits. This important skill has given profits to traders in the recent week as the market developed a retreat.

The market will develop more rally and retreat behaviour. Traders need to develop good experience to have consistent success in these market conditions.

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Timing of your exit determines what profit you make on a trade
Exits which take traders out closest to the achieved top of a trend move are more efficient than those techniques which surrender a larger proportion of the available potential profit. The exit is the action that defines the success or failure of the trade. Many exits are distorted by the trader’s greed. Greed acts most dangerously in the exit. It is greed that keeps the trader in deteriorating trades - he hopes prices will climb back to old levels so he can exit. It is greed that keeps him in losing trades - hoping prices will climb back to break even after his stop loss has been passed. Defining the exit conditions helps control greed. However, some exit techniques are more effective than others. Exit efficiency is a measure of how successful various techniques are when compared to the absolute high to the trading move. It is never possible to exit consistently at this high point, but it does provide a benchmark. The trader’s objective is to use the exit technique that has the best probability of consistently locking in the best return. Every trader works in the same market, but the results are very different. Some traders have good profits while other traders have many losses. The reason for the difference is the method each trader uses and the psychology of every trader. When the method traders use is the same, the results are not the same. Aggressive traders will enter the trade before it is correctly confirmed. Cautious traders wait too long before they enter the trade, and they miss out on profits. Timid traders use a tight stop loss and they have an exit signal before the trade can fully develop. Long term trading success in the financial market comes from 3 features. The first feature is the method the trader is using. There are many successful methods. Many of these methods are simple, and this makes the method very effective. We prefer to use simple method rather than complicated methods. The second feature is consistency. The trading method must be applied in the same way every time. Every trading method will make mistakes. The best trading methods have a long term success rate average of around 70% including bull and bear markets. Using the method, the trader is correct for seven out of every ten trades. In some market conditions the method will have a higher success rate, perhaps eight out of every ten trades. This is higher than the longer term average success rate of 70%. The consistent trader knows the extra successful trades happen because the market is good. In other market conditions the success rate may fall to four out of every ten trades. This is lower than the long term average success rate of 70%. In this condition the trader will do less trading and use more caution. He continues to use the same method because he knows the long term success rate average is 70%. A trader who does not have consistent trading will change the method when the success rates decline because he looks at the short term result. He should look at the long term result. The trader who has consistent trading will not change the method because he knows in the long term the method has a high success rate. The third feature is discipline. Discipline is required so the trader can consistently develop and manage every trade according to his trading method and trading plan. Discipline is necessary to continue to use a trading method when the success rate is lower than the long term average success rate. These three features are related. When the trading method is simple it is easier to develop consistent trading and it is easier to continue to use good trading discipline. The falling market in 2008 tested trading discipline and consistency. The recent market has many short uptrend rallies followed by rapid downtrends. This is called ‘choppy’ market conditions. There are not any strong long term trends. In this market condition it is important to apply consistent and disciplined trading. One of the most difficult activities in the market is taking profits. Many traders think it is easy to take profits but when it is time to exit the trade they find many excuses to stop them from acting. The main problem is greed. The trader looks at the highest price for the uptrend. He calculates how much profit he could have made if he had taken an exit at that price. Say $15,000. Then he looks at the current exit price for the stop loss trade plan. He calculates again how much profit he would have. Say $10,000. There is a $5,000 difference in profit between the highest possible exit price in the trend and the current exit stop loss price. If he exits at the current price then it looks as if he has suffered a loss. He only has a $10,000 profit compared to a $15,000 profit if he had exited at the highest price in the trend. Experienced traders know this is not a problem. They take the $10,000 profit and wait for the next trade to develop. Traders who do not have experience decide to wait for the price to rebound and move towards the previous price high in the trend. They want to wait for a better profit. They are greedy. In a bull market this strategy is often successful. In a bear market this strategy is not successful. In a market with a developing up trend recovery this strategy is often very dangerous. The developing uptrend is often weak after a long term bear market. The price does not bounce upwards. It may continue to fall. The profit may fall from 10,000 to 5,000. Eventually the trader is disappointed and he sells for a small profit of 5,000 instead of a larger profit of 10,000. Their greed does not have a reward. Sometimes the price does rebound and move towards the previous high price in the trend. The greedy traders do not sell. When the price rises they change their exit target. They move their exit price higher and higher. In a bear market recovery it is more difficult for the price to reach the new targets. The price retreats and develops a clear pattern that shows the end of the trend. The greedy trader does not recognise this pattern until it is too late. When it is time to sell he does not have exit discipline. Often he waits too long to exit and he misses out on the larger profit. Good traders follow the trading plan. They are successful in ignoring greed. They concentrate on collecting frequent profits. This important skill has given profits to traders in the recent week as the market developed a retreat. The market will develop more rally and retreat behaviour. Traders need to develop good experience to have consistent success in these market conditions.
Based on a paper written by Darryl Guppy