Dynamic Exits: How to Properly Exit a Trade
One of the things we’ve been teaching for years is that dynamic exits are superior to static exits.
What’s a dynamic exit? It’s an exit that relies upon recent price movement as opposed to some fixed exit date or price (a static exit). Dynamic exits consistently outperform static exits in historical testing and you’ll want to apply them to your trading.
The two dynamic exits I like to apply with stocks and ETFs are closes beyond a 2-period RSI reading of 70 as well as closes beyond a 5-period moving average (for short positions, it’s closes below a 2-period RSI of 30 and closes below the 5-period ma).
Which one of these two exits are better?
They’re both very good. In some strategies, the 5-period ma performs better in the testing and in many other strategies the 2 period RSI performs better. What we have found though is that if you are using a scaling-in process like TPS taught in my book, High Probability ETF Trading (now in softeover), the 2-period RSI has historically produced better results than the other exits. The reason is that the 2-period RSI usually holds a position a bit longer letting the move play itself out further. The downside to this is that it sometimes holds positions too long. But in looking at it on tens of thousands of ETF set-ups going all the way back to 1993, it’s consistently tested better than using a 5 period ma.
At the end of the day, both are excellent exits. They use a dynamic price process as opposed to a static price exit and this allows returns to be further maximized.
Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.