Testing Exit Strategies by Jeffrey Owen Katz, Ph.D., and Donna L. McCormick
Everyone's looking for entry trading signals, but what about after you're in the trade? Last time, Katz and McCormick looked at different techniques for making a graceful — and profitable — exit. This time, they're testing various exit strategies, both separately and in combination, to determine how well they can improve a trading system.
Last time, we discussed the problem of exit strategies. We determined that a good exit strategy is important because failing to exit at the proper time can cost a trader dearly, and we also concluded that a good exit strategy must, above all, strictly control losses while not sacrificing too many potentially profitable trades in the process; at best, it must allow profitable trades to fully mature. If risks can be controlled by quickly exiting from losing trades without killing or cutting short too many winning trades, a losing system might even be turned into a profitable one. Most important, during the inevitable bad periods, a good exit strategy that incorporates solid money management and capital preservation techniques can increase the probability that you will still be around for the next potentially profitable trade.