Simple Exit Trading Strategies to Exit Trades Sensibly

Ever find yourself spending hours planning entries only to stumble at the exit?

You’re not alone!

Traders often overlook smart exit plans, leading to their trading account blowouts. But fear not, as we unravel the secrets to bolster your profits.

In this blog, we will discuss some game-changing exit trading strategies, why it matters, and more to level up your trading game, turning your exits into winning moves.

What Does Exit Strategies In Trading Mean?

What Does Exit Strategies In Trading Mean?

Source:dailyfx

Unlocking the ability to exit trades without emotional turmoil and seamlessly move forward may sound like a trader’s dream, but it’s not far-fetched.

Achieving control over exits and emotions is a hallmark of successful traders. Long-term success in trading demands the mastery of profit-taking strategies, an essential skill in placing one’s edge in the market.

But, there are 2 biggest challenges that traders face with exiting trades – 

  • Not knowing when to take profits.
  • Exiting a position at a loss by following the stop loss – when previous trades exited, turned around, and became profitable

As per these scenarios, the toughest profit exits come after some losing trades. Imagine yourself closing five consecutive trades in the red, and then one finally starts moving favorably, only to reverse and hit your stop-loss.

It’s highly frustrating!

When the next trade shows promise, the first thing you would do is to secure a profit – after all, profit is profit.

However, it’s a big NO!

Doing this means going against the principles of your systematic trading approach. However, you must resist that!

You need to trade the system, including your exits, per your system rules. 

The desire to make profits prematurely is often due to previous frustration, but successful trading is by following a well-defined system.

Suddenly, jumping in and securing a profit can lead to missed opportunities, as price action might continue in your favor after closing the trade.

This also applies to the second challenge – which revolves around the anguish of exiting a position at a loss, especially when past trades closed at a loss and later turned profitable.

So, to navigate these challenges successfully, following effective exit strategies are essential.

Read More: Stock Trading vs. Options Trading: What’s The Difference?

Why Do You Need Exit Trading Strategies?

Consistency is the backbone of a successful trading plan, and exit strategies are essential in maintaining that consistency. Exit strategies are essential to build a successful trading system that works for you!

Whether simple or complex, exits are the tools that let you navigate and achieve your trading goals effectively.

  • With an exit trading strategy, you can stick to your chosen plan, ensuring you don’t let emotions take the wheel, steering you away from your trading objectives. 
  • Without a solid exit plan, your goals might slip through your fingers if emotions start dictating your trading positions.

Moreover, consider an exit strategy as a companion to your overall trading strategy. It’s the safeguard for practicing proper risk management and trade skills. 

With a well-crafted exit plan, you become a more profitable trader, staying on course toward your financial goals.

The Best Trading Exit Strategies To Follow!

Well, there aren’t one-size-fits-all trading exit strategies that are best. The golden rule to follow is to keep it SIMPLE.

Adding too many factors to your exit strategies in trading can lead to tailoring it to historical data, which might not work well in real-time. Additionally, the right exit strategy depends on your overall trading approach.

  • If you’re into short-term mean reversion, selling in the strong market is logical.
  • On the other hand, if you’re following a longer trend, exit when the trend is weak.

And with that, among many, below are some best trading exit strategies to follow – 

1. Time-Based Exit

Here’s one of the easiest ways to exit a trade – simply exit after a specific period, whether in minutes, days, months, or a certain number of bars. Despite its simplicity, a time-based exit is remarkably effective, making it an underrated exit parameter in trading.

A significant advantage of a time-based exit is the reduction in drawdowns. By spending only a brief time in the market, this exit ensures an early exit in the early stages of a potential bear market.

Additionally, a time-based exit eliminates the need for complex curve fitting. Instead of spending time optimizing the exit strategy, the simplicity of a time-based exit proves to be highly efficient. Hence, the simpler you make, the more robust it is! 

2. An Exit Based On Parameters or Variables

When you assess a trading strategy through backtesting, you utilize specific predefined parameters to determine the conditions for entering a trade.

For instance, one criterion might be to purchase at the closing when the two-day RSI falls below 10. In simulating this trading approach, the corresponding sell signal can be applied inversely – selling when the two-day RSI surpasses 90.

If we examine the S&P 500 from 1993 onward using the oldest ETF available (SPY) and invest $100,000 with compounding/reinvestment until September 2021, the resulting equity curve unfolds as follows:

An Exit Based On Parameters or Variables

Source:quantifiedstrategies

As per the curve – 

  • Total trades: 226
  • Average gain per trade: 1.05%
  • Maximum drawdown: 37%
  • Profit factor: 2.1
  • Exposure time (time spent in the market): 38%

The extended time in the market is influenced by the relatively high exit threshold, where a two-day RSI of 90 requires remaining in a trade for a substantial duration.

Now, let’s alter the exit threshold while maintaining the entry variable, testing various levels when the two-day RSI exceeds 50 at 5-unit intervals: 

Source:quantifiedstrategies

The second column in the chart displays the diverse values. 

For example, the second row illustrates the outcomes when exiting with a two-day RSI above 55. This strategy yields the following equity curve:

outcomes when exiting with a two-day RSI above 55

Source:quantifiedstrategies

As per this curve – 

  • Total return: Reduced
  • Maximum drawdown: 24%
  • Total trades: Slightly higher (303)
  • Exposure time: Substantially lower (14%)

By experimenting with different exit criteria, one can observe how adjustments in the exit variable impact the trading strategy.

3. Based on Risk-to-Reward Ratio

This exit strategy is among the most practical exit strategies in trading. Imagine you enter a trade with a risk-to-reward ratio of 1:3. As the trade progresses in your favor and reaches a 1:1 risk-to-reward ratio after some time, you can trail your stop loss to breakeven.

This adjustment ensures you won’t lose that specific trade once it reaches the 1:1 risk-to-reward ratio.

Likewise, if the trade reaches a 1:2 risk-to-reward ratio, you can take further action by trailing your stop loss to secure one-third of the profit. This one of the dynamic trading exit strategies allows you to protect your gains and manage risk effectively as the trade develops.

4. Stop-Loss Exit

Every trader knows, and many books and articles talk about the importance of implementing stop losses in trading. Despite the widespread acknowledgment of their significance, it’s uncommon to find a strategy that improves by including a stop-loss. While the primary purpose of a stop-loss is to mitigate the risk of ruin, other techniques can address this issue.

So, placing stop loss is essential, and they should be positioned to exit the trade when the security violates the technical reasons you took the trade.

However, this concept can differ for traders who set stops based on arbitrary values, such as a 5% drawdown or a fixed INR amount under the entry price.

These approaches lack logic as they aren’t tailored to the specific characteristics and volatility of the asset. Instead, it’s advisable to use technical features like trendlines, round numbers, and moving averages to determine the natural stop-loss price.

In today’s markets, effective stop placement requires an additional consideration. Algorithms frequently target common stop-loss levels, triggering a shakeout of retail traders before bouncing back across support or resistance. To avoid these stop runs, stops should be placed away from the obvious levels indicating an exit. Determining the perfect price to avoid these stop runs is more of an art than a science.

As a general guideline, real-time monitoring allows you to exit at your original risk target and re-enter if the price rebounds beyond the targeted level.

5. Trailing Stop Exit

A stop-loss can be either static or dynamic in nature, and the dynamic is commonly referred to as a trailing stop. A trailing stop initiates with a fixed level below your entry price, but as the price moves favorably, the trailing stop adjusts upward.

If the price falls, the trailing stop remains unchanged, and you exit once it is hit. A trailing stop begins as a stop-loss but may transform into a “profit stop” based on price movements. However, the advantages of a trailing stop are minimal or nearly non-existent. 

6. Based on Moving Averages

Securing profits when the market is in your favor is crucial, and one effective indicator for this purpose is the moving average. Many traders utilize moving averages to trail their stop-loss.

The choice of a specific moving average for trailing stop-loss varies among traders—some prefer the 9EMA, others the 10 EMA, and so on.

Your selection depends on your comfort level and backtesting results. When the price closes below your chosen moving average, it signals an exit, allowing you to cut your trade and lock in profits. This is the fundamental mechanism behind moving average exit strategies.

7. Target Exit

This exit method is about setting a profit target.

Let’s understand different profit levels using the same example of buying when the two-day RSI is below 10 and selling when the two-day RSI exceeds 90 – 

Source:quantifiedstrategies

The second column displays profit target levels ranging from 1% to 10%, with 0.5% intervals.

Without employing additional stops, the total profits fail to outperform the original strategy at any of the target levels. The maximum drawdown remains consistent across all levels, ranging between 30 to 40%, aligning closely with the original strategy. 

This underscores that, in this scenario, the profit target exit method does not significantly improve overall performance.

What Do You Need To Consider In Your Exit Trading Strategies?

Before selecting the suitable exit strategies in trading, consider several factors –

Risk-Reward Ratio

Define your trading goals and determine how much you aim to make.

  • Assess how much you are willing to lose on a trade.
  • Establish what you can afford to risk on a particular trade.

These considerations help determine an appropriate exit trading strategy based on risk and reward.

Bid/Ask Spread

Exiting a position often requires liquidity from other market participants.

The bid/ask spread measures the time it takes for new participants with open positions (bids) to fill your orders (asks).

Understanding the bid/ask spread is crucial for gauging the efficiency of your exit strategy.

Risk Tolerance

Evaluate your risk tolerance, which reflects your willingness to accept larger losses for the potential of higher profits.

  • High-risk tolerance may allow for a wider stop-loss distance in the exit strategy.
  • Low-risk tolerance limits the investment at stake, providing peace of mind.

Trading Style

Consider your trading style when choosing an exit strategy.

  • Some traders prefer minimizing risks and locking in gains early.
  • Others may have a higher tolerance for larger losses, anticipating potentially larger profits later.

Tailor your exit strategy to align with your trading style and risk preferences.

Read Also: Top 10 Stock Chart Patterns All Traders Should Know

Conclusion

Building diverse exit trading strategies allows you to properly manage your positions based on real-time market developments post-entry. 

And, the overall concept behind all exit trading strategies is effective risk management. Knowing when to cut losses or secure gains promptly is essential when market conditions make them unattainable or excessively risky.

Follow these considerations while aligning your exit strategies in trading, to enhance your overall trading approach and increase the likelihood of achieving your financial goals.

Also, remember, executing effective exits doesn’t have to be complex, especially if you approach entry and exit strategies with simplicity and apply the right exit to the corresponding market scenario. By doing so, you enhance your ability to navigate the dynamic nature of the market and generate favorable results for your trades.

For additional guidance and insights, explore Upmarket Academy free trading courses and resources to learn how to implement these exit trading strategies to exit trades effectively, and more about trading.

Learn now and elevate your trading with us!

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