Revised Exit Strategy For Short-Term Trades

I think the greatest challenge to trading stocks isn’t when to buy, it’s when to exit. Many rules and strategies exist for both ends of a trade, but many of them either leave too much on the table, are somewhat complicated, or aren’t entirely mechanical and still rely on the trader’s interpretation of price movement. In my previous stock picks, I based my exits on channel positions, support/resistance, and trailing stops. Those can work, but they’re still interpretive, and when we have money in the game we often tend to either jump out too soon because of fear or stay in too long because of greed.

My revised exit strategy is purely mechanical and will allow you to set protective/profit holding stops that you simply adjust when the Donchian/price channel indicator says to do so. Here’s how it works:

  1. Upon entry, set your protective stop at the most recent swing low.
  2. Add a 5 period Donchian/price channel overlay, adjusted to show just the lower channel (I changed the appearance of mine on TradingView to be dots, rather than a line).
  3. Add a 15 period Donchian/price channel overlay and adjust it to have the same appearance, but change the color to clearly differentiate it.

These lower price channel points will now be your first half (5 period) and second half (15 period) trailing stops. Now, as price moves up (hopefully) enough that the 5 period stop rises from the initial protective position, set half your shares to exit if that stop is hit (leave the other half at the initial protective stop for now).

As price rises enough for the 15 period stop to rise from the initial stop position, set that as your stop for the other half of your shares. Even if the “first half” is stopped out quickly, leave this half in place, as it will often be clear of any sharp, short-term pull backs and will let you inhale larger profits.

Looking at the example of CRMD, below, our entry criteria would have been met at the close of 10 August, so we would have actually entered on 11 August at the open of $1.44. Our initial stop would have been the recent swing low of $1.35 on the 9th. The 5-day stop (red) rose until it was knocked out at $1.62 on 23 August (12.5% profit on the first half). The second half of our shares, protected by the 15-day blue stops, rose to $2.45, when they were knocked out on 14 October for a nice 70% profit for that half. No muss, no fuss, no guessing.

Now, obviously there’s absolutely nothing wrong with setting price targets, using trend lines, the Ichimoku cloud, etc. as your exit positions, and if those (or other strategies) work well for you, power to ya! But in my own experience I’ve found that fear and greed get in the way too much, or I don’t set the stop quite right (“missed it by that much”), etc. This approach, on the other hand, takes all the emotion and guesswork out of exiting the trade.

Regardless of how you choose to do it, good luck out there today and I hope you make some money!

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