12/02/2010

Exits are inherent to setups Part1

Exits are inbuilt in to setup idea. You do not have a setup idea if you do not have a exit strategy. 
You do not have a complete setup if your setup idea does not have exit strategy inherently built in to it.
If you are struggling with exit, what is means is that you do not have a complete setup or you are trading a wrong setup or you do not understand what setup is.

Trend Following Setup

Trend following setup has inherent exit strategy built in to it. Trend followers buy on new trend start and exit at end of the trend. For example if your trend following strategy strategy the basic idea behind the setup is to capture a entire trend. Or remain in the trend till it reverses.
If your trend following setup enters on Two Moving Average crossover it also exits on Two MA crossover.
If your trend following strategy enters on a 20 day high, it exits on a 20 day low.
Trend followers might tactically change exit strategy after a trade is profitable by using a shorter trend filter to exit than that used for entry but it is still inherent to trend following concept.
Trend following methods have 20 to 25% success rates in terms of % of trades . If they use non trend following exits , they will have even lower success rate. The inherent logic to trend following is to capture those 3 or 4 long trends in a year that will contribute 80 % of your profits.

Setup logic=trend following
Setup Entry= 7ma crosses above 14ma
Setup Exit= 7ma crosses below 14 ma
If your religion is Trend Following your entry and exit logic has to be based on trend following.



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1 comment:

Anonymous said...

Excellent point Stock Bee. Trend Following is the most profitable method of investment whether is an intraday trend, or multi year. Where beginners and other niave individuals write it off, is where they see the success rate. However, the average win to loss far out-does the success rate, making it extremely profitable. This is why money managament is key. Tiger Woods stated it best after a match one day, "My strategy is to not get too far behind, so that when I have a good hole, it puts me ahead, not catches me up."