Managing Your Exits

Click Here to Watch the Video on Managing Your Exitsmoneyshow_managing_your_exits_07-12-10_jackie_ann_patterson

Karen Gibbs (K):    Is it different for investors versus traders?

Jackie Ann Patterson (J):  Yes, I really think it is.  I think that the time frame, the mindset that you start out with has a big effect on the type of exit strategy that you’d like to use.  Certainly if you’re entering the market with an idea of holding a position for over a year, getting favorable long-term tax treatment, you’re going to want to do something different than a swing trader. If you’re a swing trader entering the market, and you want to get gains not after a year, but after one day, or four days, that’s going to prompt you to think about exits a little bit differently.

K:    What are the key elements of a trading strategy?

 J:   Well, I think there’s two really big key pieces to a trading strategy or to an exit strategy, in particular, and one is how do you handle losses??  When do you cut losses short?  What sort of method will you use to limit your loss and be able to preserve your capital and your peace of mind in order to be able to trade again?  So that’s one side.

The second side, I think, is how to capture gains, when to take profits. It’s important to think about that also as part of the exit strategy.

K:  How do you suggest limiting the losses?

J:    Well, I think there’s a couple different ways to limit the losses.  As far as exit strategies go, looking at a particular point, a particular price, whether you set that in the market as a stop loss or keep that in mind, that’s one way to do it.

The other way is to have a particular signal if the conditions change.  That could be another way to limit losses if somebody has, for example, gotten in when price has been going up, has been passing moving averages, if price starts going down, passing those same moving averages, that might be a signal to get out, even if the position has not yet become profitable.

K:    And ringing the cash register, taking those gains.

J:    Yes, yes.  I think that’s the happy part of trading, and it’s also a part that may not get as much attention as it fully deserves, to think through what sort of situations will be the time to ring the cash register, to get a paycheck.  Does a person want to set a target and exit when the price reaches a certain point, whether that point is a dollar amount or whether that’s a certain configuration of indicators, or is a person more inclined to let winners run and do something?  Say, for example, trailing a stop along with the price as the price goes up, to match that with a trailing stop price, and in that way protect profits using a stop, as well as limiting losses.

K:  So you have to kind of match it to your personality or style?

J:   Yes.  I think that’s really a key thing, is to match the exit strategy to your trading style and to your personality and to your temperament and that will give you a boundary of the different sorts of exits you might consider. 

For example, the long-term trader might be more interested in strategies that let the winners run and go on longer versus a short-term trader might be more interested in setting some very near-term targets than taking profits, but within that context, I think it’s also important to understand the trading strategy and understand the potential performance of the trading strategy, and use that hard data to make decisions about which strategy might work out best for you.

K:    Jackie, thanks for your insight.

J:   Okay.  Thank you.

K: My guest has been Jackie Ann Patterson.  You’re watching Video Network.

Death Cross on the S&P500

The S&P500 recently gave a Death Cross signal.  As you might guess from the name, the Death Cross is generally considered bearish.  

Read the Golden Crosses and Stop Losses BackTesting Report to learn about a trading strategy which relies on the Death Cross as a sell signal.

Watch my MoneyShow presentation which includes the Death Cross:


Exit Strategies for Active Investors

Here’s a good  video with live charts about the death cross, what it is and how to trade it: 

Adam Hewison on Death Cross

(the next article about forward-testing tools will be posted on this blog on Friday)

Negative Divergences Abound

Since its not always easier keeping up with the market over a long holiday weekend, I thought to share my weekly “homework”.

Plenty of interesting red flags from my MACD Divergence Detector running on StockFinder®.   It found MACD and MACDH negative divergences on SPY, DIA, ISRG, BIDU to name a few.    Looking at the chart of SPY below, its clearly not the first negative divergence.

MACD Lines and Histogram do not confirm price action on SPY
MACD Lines and Histogram do not confirm price action on SPY (click to enlarge)

The other SPY negative divergences kicked off a slight decline, followed by a rally.   What’s to say that won’t be the case again?

First off, consider that the markets may very well rebound again.  It is, after all, a seasonally strong time of year.  I don’t want to make recommendations or predictions here, just share some observations.  See Truth About MACD BackTesting Reports  for data on the historical back test performance of MACD divergences.

The next observation to share is that breadth and New Highs / New Lows (NH-NL) exhibit extraordinary negative divergences of their own.   Here’s a chart with McClellan’s Summation Index to show what I mean.   (Note that I didn’t personally run a back test of McClellan’s Summation Index.   Tom McClellan told me he did.  I wish the strategies of other people who have told me that had performed better in my back tests.  Anyway, until I get around to doing the back test myself, I am taking McClellan’s word that the summation index that bears his name is a useful indicator to have in the toolbox.)

Red arrows highlight divergence between SPY (green) and McClellan Summation Index (yellow)
Red arrows highlight divergence between SPY (green) and McClellan Summation Index (yellow)

With these kind of negative divergences showing I am certainly not thinking of buying the dip!   In fact,  negative divergences are a signal to sell long positions in my book.    

If you are also standing near the door (so to speak), or working on your own stratgy for cutting losses and taking profits, you may want to take a look at the Exit Strategies series of BackTesting Reports.   They show back test results for various kinds of fixed stop losses, trailing stops losses, and profit targets.    That stuff isn’t as glamorous as buy signals but if you didn’t make a solid plan for when to sell before you bought, the next best time to think about these things is while the market is up.