Exit Strategies

[bryanmcn]

Hi All
From what I understand, exit strategies are more important to profitable trading than any entrance signal. I have been using a rather wishy washy tactic using candlestick signals, but it doesn't always work and I don't always follow it.

Does anyone have a good, easy to follow exit system that has served them well in bull and bear markets?

Thanks
Bryan

[Victor]

Hi Bryan,

here are a few ideas:
1) Initial stop: I'll usually set this below support.
2) Time stop: if a stock hasn't posted significant gains after X number of days/weeks I'll sell it.  I'm trying to capture rising stocks, so money tied up in sleepers is wasting away.  I'm way more lenient (sp) on value driven purchases where I expect solid dividend payments.
3) Trailing stops: I'll raise stops based on support after a stock breaks through resistance.
4) If the stock rises straight up without posting a near term support I'll use a few strategies:
a) don't give up more than 50% of profits.
b) tighten up stops significantly if:
i) 20 day RSI > 70
ii) 20 day 2.33 std dev BB% is > 1.2 (sometimes > 1.0). This doesn't apply if the stock was really really flat prior to a breakout as it's easy to hit this metric in those cases.  However, if a stock is moving, generally up, and then pops past this mark it's usually a top or near a top.  You can usually get back in as it retraces back to the moving averages (pick your favourite) if you still like the stock.  This stop is particularly important if the stock can't close at or very near the high of the day.
iii) 20 day ADX is above 35 and DMI+ falls below ADX.  Some stocks will continue rising a fair bit past this mark, for others this marks a top.  Sometimes I'll take half off at this point.  Then I'll set a wider stop of the rest.
Tightened stops are usually below the lowest low of the past 2 days. I'm still tinkering with this one (where to place the tightened stops). If the stock levels out and doesn't trigger these stops I'll let it drift to allow a futurue run up.

Cheers,

Victor

P.S.  I hope others post their favourite stops.

[garilou]

Hi Bryan and Victor.

I have been away from this forum for quite a while, and won't write much in the coming days, but like Bryan,  one of my problems has always been the "exit strategy", and I intended to start a new thread about how to put a stop. So thanks Bryan for starting this one.

Bryan speaks of "exit strategies", Victor replies with ways of placing stops.
I think that stops are one of many possible exit strategies.

In most cases, stops - as I used them - were rarely useful, if not harmful: they bumped me out too early, at much lower prices (because as soon as your stop triggers, it goes at market, and then unless there is a lot of "traffic", the stock starts back up, as soon as I've been stopped out of it.)
Sure if you put a stop on let's say on Bombardier, where most of the time, buyers and sellers are there by millions, at 1 cent difference between ask and bid, this is not a big problem, but I own one where there are very few shares in the ask as well as on the bid, and the difference between them is very big! So during one trading session, there seems to be no clear direction.


Victor, your post is really interesting, even if not quite as easy to understand and still less to apply in real life: it must be a lot of calculations, especially if you have many holdings! But I'll print your post, study it, and  see if I can use at least some of it.

You write : "don't give up more than 50% of profits". I find this is a lot! Well sure it depends on how much is that profit. I'll let go $25 on a $50 profit, but not $2500 on a $5000 profit! I guess we all have different scales...
What I do if I have a reasonable profit, I do not put a stop: I sell, secure that profit, and jump in again. I do that mostly for shorts, but I think it's good for longs too. During the big bear market, I shorted HD (US) and TD (CND) 3 times each.

====================================

Because your PS asks others to post their favourite stops, I'll first bring up one, that is NOT from me, I've noted that formula long ago, and I cannot even remember where I've found it: I've goggled a lot, and did not find it again.
It has at least the advantage of being easy to calculate.
Two considerations had me think I could like that formula: it takes into account
1. your whole portfolio, and
2. the risk you are ready to take,  in the sense that I would accept less risk in a given portfolio.

The formula reads so:
S = (100 * R * N) / C
where
S would be the stop expressed as the percentage below the price of the stock,
R the risk that one is ready to accept on any of the stocks,
N the number of stocks in the given portfolio,
C the percentage of the portfolio that is invested (in stocks).

Now, I don't know where that 100 comes from, I was unable to figure out, and I left it out of my calculations, because it gave impossible results.

In practice, in my case, I am ready to take more risks is my US portfolio. That portfolio is not as "rich" as my RRSP, and US stocks are often more expensive, so I can't hold too many position. Is is "alimented" (is this English?) by Oil and gas Royalties that I receive each month.
As for now, for example, it is invested to 96%, (excluding the margin) but holds only 4 different stocks, and assuming I'd be willing to accept a 10% loss, I would set my stop 42% under the stock price.
Had I 5 different stocks, the stop would drop to 52% !
Or, if I accepted a risk of 15%, and had only 4 positions, the stop would drop to 63% on each stock.
Well, this is the big problem: I am not a mutual fund, I cannot hold and manage hundreds of stocks, and I would never let a position go down as much as 50 to 60% before I'd sell!

I would really like to know what you think about it.
====================================

As for some of my own exit strategy (strategies) - apart from stops:

1. I watch the volumes a lot! An abnormally high volume on no news means some people know something that I do not know.  Or simply that the stock has suddenly been discovered. (especially if it's a stock not covered a lot by analysts, or not in the "top tens", like APPL,  RIM  [This is good for entry as well as exit, just reverse, although a stock that might me at the end of it's run, or at least is ready for a correction usually starts with slowly but decreasing volumes].
But it also does not work properly all the time! This is how I got out of my short on RIM, much too early! There was so much volume on the upside, I took my profit after only a few days, and then ... well you how RIM took the way down again: This was really a "Sell and hold" position.  I chickened out, I guess Bryan you can remember.
But if I look at charts, I always look at the weekly data.
But this alone is not always reliable. (is there anything reliable in the stock markets?)

2. I watch the evolution of the short positions. (Unfortunately, they come out only twice a month, which nowadays is incomprehensible)

3. I watch the insiders tradings and the funds moves when it applies.

4. I check where the price stands as compared to the analysts targets, if it has already moved higher than the average target, I search a little bit more if their is a reason to hold.

5. I do NOT use the candle stick pattern a lot, except maybe to find a proper entry point, more then a exit point, and then only based on weekly data. But candle stick patterns are really for short term, and you can have big discrepancies between daily and weekly patterns.

6. I do not considered at what point I entered, but where I think most of the holders came in (sure it's only a guess, but when to stock turn direction with a big volume can be a reference) , and I considered what they had for a profit. If they had more than 100% profit,  there is a good chance that there will be some profit taking.

7. I get extremely cautious in the days before the publication of the results, quarterly or yearly. Too many non significant news or press releases, sudden increase of analysts ratings for stocks widely held by funds,  makes me become pretty cautious too!

8. When a stock goes down a lot, I try to find out if it is the stock or only a move from a general move, like the big scare last week with the Dubaï debt. This is one case where a stop caused me damage, as I was long on RY, and I was badly stopped out. Was my stop too tight? Probably.

9. And yes I must admit that sometimes I act like one should not, emotionally, or maybe better said intuitively. That was the case when I started to say that RIM was a "has been". I felt so alone, when I looked at the discussion on the Google discussions, I posted a few times there, and I was often ridiculed.

OK if I was an American, I guess I should add a point, you know how they love the 10 things etc...


Thanks you guys for your insight, I also hope others will jump into this thread.

Louise

PS. OK, my posts are always too long, this is one of the reasons I have cut down my participation to the forum. Sorry for that.

[bryanmcn]

Thanks Victor
I have discovered the CCI (20) is a great entrance signaller but it seems to have exit signals as well.
Check out this guys take on the subject;

http://www.youtube.com/user/jeffcartridge

Bryan