December 14, 2005
If you are looking for an exit strategy then you need to know that there is alot.
Its better than you paper trade them before putting real money, because for every trading system, one exit strategy can perform better than others.
Also each exit can reduce or higher risk.
Don't forget that if you reduce risk then you reduce potential gain and the opposite is true.
Its really hard to reduce risk while improving gains.
When i try to build a short term trading system, i back-test this system with each exit strategy i know.
Generally i get these results :
- using fixed stop loss reduce gain and doesn't reduce drawdown.
I think its better to use a stop loss than depends on the volatility of the stock, example using ATR stop (Average true range), or use a stop loss just below the last consolidation.
- I Never back-tested systems using profit target but i think it should work if these targets are near resistance lines.
- Generally Stop loss reduce gain but also reduce maximum drawdown, so i always use it in my systems.
All theses exits strategy can be used of course with day-trading but i want to talk about other less popular day-trading exits.
- Exit when a change in market trend happen (You need to follow index graph)
- Exit when you see a short pressure in the tape (You need to be a tape-reader)
- Exit if the stock is reported in trade-ideas screen (You set up a screen that report short alerts)
Example : you buy a stock when trade-ideas show for this symbol the alert "Channel breakout"
and then you sell that stock when it report the alert "Stock making 5 minute low".
There is many other exit strategy but i just wanted to give you some of my ideas.
Paper trade, back-test and you will make money like me :)