Whether you are following your own trading system, or following an advisory, newsletter or some other service, if you don’t have an exit plan for discontinuing it, you should.
Why? Studies have shown that when people are under stress, many times they make poor decisions. Certainly if you were losing money with your systems you would be stressed. Consequently, you might make a knee jerk reaction to the losses, or you may stick your head in the sand and avoid a decision all together. Both scenarios can be dangerous. So, the time when you are losing is a bad time to determine when to exit.
Ideally, you already determined when to stop trading when you first decided to trade the system. If not, it is not too late. Just determine the metric(s) that are most important to you. They could include such things as:
• Maximum drawdown
• Consecutive losers in a row
• Amount lost in a week/month/year
• Overall profit after X months
• Overall winning percentage dips below XX %
• Significant break in your personal equity trendline, or equity moving average
• New highs, or breaking of another “good” metric (yes, some people try to quit at the top)
• Anything that can be measured and monitored
The exact condition you select probably is not as important as writing it down and sticking to it. That is the key. It needs to be solid, definitive and written down. Ideally, you’ll also tell your spouse or a friend, too, since it is harder to back out when you make the proclamation public.
I’ve heard that one money management firm’s exit criteria is 1.5 times the maximum drawdown, and a 24 month commitment. Those aren’t bad, but the best one is the one that you feel comfortable with – one you can stick with.
You’ll definitely worry less about your system’s performance if you write down and follow your exit plan – today!
How do you feel when your trading position goes against you? Do you react instinctively or do you follow a specific plan of action? Here’s what Richard Dennis has to say about this issue: “When things go bad, traders shouldn’t stick their head in the sand and just hope it gets better. You should always have a worst-case point. The only choice should be to get out quicker. The worst mistake a trader can make is to miss a major profit opportunity. 95 percent of profits come from only 5 percent of the trades.” Ignoring issues will usually carry negative consequences in the future. Have a well-researched plan and execute it with focus!