EXIT STRATEGIES COMPARISON PART 5

By Jim Berg and John Atkinson

No trading system will ever consistently find absolute bottoms or tops. Your aim should
be to have your own tested and documented system which you can rely on to provide more and
larger profits than losses.
Over the past few weeks we have looked at Jims four main exit strategies:
1. Short Term Trading:
o JB Profit Taker
o Profit Target
o JB Volatility Trailing Stop (daily chart)
2. Long Term Investing:
o JB Volatility Trailing Stop (weekly chart)
Our Newsletter Portfolio is designed to demonstrate Jims short term trading rules, so in
our notional portfolio, no preference is given to any of the three strategies listed in 1 above, i.e.
notional Exits shown in the Newsletter are simply based on whichever of these alternatives is
triggered first*. For completeness, in this comparative analysis, we also added Jims Long Term
Investing strategy (2. above).
Table 1 below summarises this analysis of all 4 exit strategies applied to one share
(EXT) at a snapshot in time:
Table 1: Summary
Entry Date: 8/9/2010
Entry Price $6.42

We said at the outset there will be no single answer which you will be able to apply to
give the best results in all cases. Some trades will yield the best profits by grabbing profits
quickly (particularly in nervous markets); others may generate more by holding for a few weeks
or even months longer using a trailing stop and others may provide significantly better profits
using weekly charts.
We also wrote; In practice, Jim often prefers to use the JB Volatility Trailing Stop for
both short term trading and long term investing on daily and weekly charts respectively. In fact,
for this particular analysis, Table 1 shows that the JB Volatility Trailing Stops applied to both
daily charts and weekly charts would have given the highest % results.
In addition, in this case, the last column shows the profit per week by short term trading
using daily charts was 3.1% per week, compared with only 1.0% per week by longer term
investing using weekly charts.
Re-examine this share at a different time, e.g. when it next provides/ provided an entry
signal or analyse another share in a similar way and you will probably find that the results will
not only be different in size, but also in relative order.

In the introduction we wrote; .in addition to the overall market conditions and development of
the individual trade price action (over which you have no control whatsoever), the final decision
of exit strategy you adopt will often depend on your personality, risk profile and circumstances.
Two old clichs in the market are:
1. Youll never go broke taking a profit and
2. Cut your losses short and let your profits run
Most experienced traders agree that knowing when to get out is just as important, if not
more important than knowing when to enter a trade. The aim of this series has been to show the
importance of creating, then sticking to, a tested and documented approach for exiting a stock.
In this analysis, profits would have been locked in using all of Jims main 4 exit
strategies. We could have also shown other possible strategies, including Daryl Guppys Count
Back Line (CBL); Louise Bedfords candlesticks methods; sell on negative major news; exit on a
close below a trend line, etc. The possibilities are endless. Importantly, our aim should also be
not to let significant open profits become a loss.

For example, the chart above shows that if the trades had been bought on a BHP
approach (Buy, Hope and Pray) and were held for the long term with no exit strategy in place,
then in this case, by the Low of $5.90 on 9 August 2011, i.e. 11 months after entry, the potential
profits of 10 to 30%+ in 6 to 29 weeks would have switched to an open loss of -8%.
We trust you have found this exercise helpful and encourage you to replicate it with a
series of your past real or paper trades; then produce a series of similar tables to compare the
results of your own exit strategies.
This should help you back test your trading system and to hone your analysis skills. This
article is an extract from Jim and Johns Investing & Online Trading Newsletter at
ShareTradingEducation.com
TRADING METHODS
STOP LOSS
A stop loss is a pre-determined exit point. When a trade is first planned the stop loss is designed
to protect the traders capital. The exact price of the stop loss is the result of a relationship between the
maximum level of risk as determined by the 2% rule, the logical support levels on the chart, and the
amount of capital the trader wants to allocate to the trade. By varying these three figures the trader is able
to reach an ideal trading solution that controls risk effectively.
A stop loss order should always be constructed at the same time that any trade is planned or
entered. Disciplined stop loss sell orders are the key to long term trading success.