Exit Strategies with Profit

Discussion in 'Trading' started by white, Apr 25, 2002.

  1. white


    I am starting this thread to get a idea of what sort of exit strategies successful traders employ when they have a profit. I find myself missing most of the big move. Often times I will take 10 or 12 cents just to see the stock move 25 or 30 cents, sometimes more. Any thought or strategies welcome.

  2. doublea


    I have a similar question.

    Say, I bought 100 shares of ABC at $20/share- stop loss $19. It goes up to $25. I buy another 100 shares at $25.

    My question is:

    Should I move my stop loss to $24 for all 200 shares or $24 stop loss for 100 shares and maybe $22 or $23 for the first hundred since I have $500 profit on the first hundred shares. I do not like tight stops because I follow a swing trading strategy. In the past when I used tight stops I got stopped out many times just to see the stocks move in the direction that I had anticipated. Now I just trade few shares but with a wider stop. Is it better to sell on the way up or should you let the market take you out.

    Any suggestions/insights appreciated.
  3. White,

    Isn't this deja vu all over on the profit exits thread?

    I think getting out with a profit is directly related to how you get out with a loss. You should shoot for profits of 2x your risk or greater. So if you are taking avg losses of .2 you should shoot for .4 or greater just to cover your costs. If your strategy doesn't allow you to take profits double the size of your losses then maybe you should evaluate whether your strategy has a long term positive expectancy. It is possible to have a positive expectation with a high % of winners but that might be added pressure.

    If you are also able to trade with a high % of winners then this is icing on the cake and your results will show net positive very fast. You might take half your profit at 2x risk and then manage the other half if you like to "fiddle" with things.
  4. Doublea, you might take a look at the position sizing discussion found in the Phantom of the Pits (rule #2, Press your winners). IIRC The Phantom suggests increasing position size by half each time. I'm no scaling expert but at first blush taking equal share amounts on the way up may make your position top heavy.

  5. white



    Good memory,

    That thread was about taking losses, but I see your point how they are basically inversely related. My problem is taking that first 10 cents, then watching the stock move another 20 cents or not taking it, them saying "dam I should have booked the profit". Tripack, Are you saying don't take the ten and hold for the 25 cents, and maybe loosing the 10 cent profit, and then just getting out even?

  6. buret


    Have you thought of using a gradual exit ? i.e. get 50% out at 10cents profit then wait and see. If it indeed goes to +20cents, get rid of the rest ?
    If you do not use this approach, is there a reason why ?
  7. Let's not forget trailing stops either. They can be quite useful.
  8. buret...good point.

    To white,

    Depending on what you trade and how you trade...traders will have different exit strategies.

    What I found to help me was to have a profit-target for 1/2 my position and another profit-target for the remaining 1/2 before trade entry.

    Also, some trade setups may require me to exit all at once. For example, if the overall trend is down and I see a good Long position setup...I tend to take profits fast and exit all at once.

    Just the same, if the overall trend is up and I see a good Short position setup...I tend to take profits fast and exit all at once.

    Whereas, if the overall trend is down and I see a good Short position setup...I tend to use two profit-targets and vice versa for Long positions.

    Thus, the plan before the entry in many ways will be the plan for the exit.

    This way if I exit as my plan had designated...I should never get concerned with what the market does after I'm no longer in the position.

    Further, if I see a pattern after studying my trade journal that I'm leaving too much on the table...then I obviously need to revised my profit-targets...revise the plan.

    Once again, different trade setups often have different profit-targets and different stop/loss protection.

    Nihaba Ashi
  9. White,

    Your trading plan is something you will have to ultimately come up with because you and only you must be able to follow it. It is hard to follow something you don't buy into. However you are seeking advice so let me give you an example or two to illustrate what you might do to set up a plan with a positive expectation of profit. The key to this is studying your market to see what the actual average profits/losses and % profitable is. You can make a good estimation from your own trading logs.

    Your original post mentions taking profits of 10-12 cents when 25-30+ cents are sometimes available. Let's assume your average loss or stop loss including slippage is 11 cents. If your average profit (including slippage) is also 11 cents and you have a 50/50 win/loss % it doesn't take a rocket scientist to figure out that commissions will wear you down over time.

    So let's talk about a profitable plan: let's presume your plan averages 11 cent losses. However this time let's presume you wish to take 21 cent profits out (or roughly 2 to 1 reward to risk). If you are 50/50% again you can expect to average 5.25 cents per trade. Assuming 100 shares and $2 round turn commission you can expect to make per trade: .0525 x 100 - $2 = $3.25 per trade of 100 share lots.

    Now let's look at a different variation. This time we take half the profit at 21 cents avg and half the profit at 30 cents. However because we change the way we take profits our losing % becomes higher. So we alter the plan so that if we have 10 cents of profit in our favor we move stop to breakeven and when it is 12 cents we take 2 cents profit minimum. Now we have a very complex math problem to solve for. Our stop loss % is lower now because we are taking more breakeven exits but our profit target % comes down too, however we win more with the 30 cent winners. We now also have a new *breakeven trade* % that will steal some of the winners and also some of the losers and will just about break even.

    I'm not going to plug in hypothetical percentages because this post is already long enough and the math would get too convoluted (the percentages are made up anyway so they are meaningless).

    #10     Apr 25, 2002