How to Exit a Trade
I got a very good email from a subscriber yesterday asking me about the 5 ma exits versus other exits. In today’s Trading Lesson of the Day, let’s look at different exit strategies and how to apply them.
First there is no such thing as a perfect exit strategy. But you can use quantified exit strategies that allow you to exit into strength on the long positions and cover into weakness on the short positions as we did in the Daily Battle Plan Tuesday afternoon.
The two exits I like best, and which also test the best, are the cross above/below the 5 period ma exit and the 2 period RSI above 70 (under 30 for short positions) exit. Each is covered in further depth in my book Short Term Trading Strategies That Work.
If you use a 5 period ma exit, you can just as easily use a 3 day, 4 day, 6 day, and 7 day ma exit. The shorter ma exit will likely have a higher percent correct than the 5 period but the average gain per trade will likely be lower (you’re often getting out too soon). The longer period ma exit will likely give you a higher average gain per trade but the percent correct will likely be lower (you’re in the trade longer exposing yourself to more risk). The same principles hold true for the RSI exits. How you look at your trading will dictate which exit time frame you’re most comfortable with.
There are other good exits. For example, the first up close exit, (I believe originally taught by Larry Williams) shows surprising good test results and is a very interesting concept. The key to all this is to choose the exit that provides you with the best statistical evidence and which makes you most comfortable. Then stay as disciplined as possible and stick with it.
The exits mentioned above are all excellent and again there is no such thing as the perfect exit for every trade. Most trades will move further after you exited and a few may get close to exiting at the high or low (but this doesn’t happen often enough!). The key to properly exiting a position is to find that sweet spot which has historically been the best place to exit short term trades. Based upon the test results on over 8 million trades, the 5 ma and the 2 period RSI rank amongst the best at doing this.
I hope this helps guide you with your exits. Many people like to tell all of us when to get into a trade. But knowing when to get out is just as important.
Every day in our Battle Plan we’ll provide you with incisive, before-the-bell commentary and analysis on the day’s markets to help put your trading in context. We’ll give you suggested entries and exits for short term trading opportunities in stocks, ETFs and options that may be only hours away. And we’ll give you what many other people can’t: model-driven percentages so that you know the historical win rate going back to 1995 for every single trade idea – long and short.
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Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.