Standard exit strategy (SES)

Posted on June 26th, 2008 by admin, under online forex trading.

The standard exit strategy (SES) was used throughout the tests of entry methods. Basically, the SES employs a money management stop, a profit target limit, and a market order for exit after a specified amount of time. The examination of this strategy provides a baseline against which variations and more complex exit strategies may be judged.

WHAT IS THE STANDARD EXIT STRATEGY?

Although the standard exit strategy is basic and minimal, it does incorporate elements that are essential to any exit strategy: profit taking, risk control, and time exposure restraint. The profit-taking aspect of the SES is done through a profit target limit order that closes out a trade when it has become sufficiently profitable. The risk control aspect of the SES is accomplished using a simple money management stop that serves to close out a losing position with a manageable loss. The time exposure restraint is achieved with a market order, posted after a certain amount of time has elapsed. It closes out a languishing trade that has hit neither the money management stop nor the profit target.

CHARACTERISTICS OF THE STANDARD EXIT

The standard exit was intended to be simply a minimal exit for use when testing various entry strategies. As such it is not necessarily a very good exit. Unlike an optimal exit strategy, the standard exit is unable to hold onto sustained trends and ride them to the end. In addition, a profit can be developed and then lost. The reason is that the SES has no way of locking in any proportion of paper profit that may develop. A good exit strategy would, almost certainly, have some method of doing this. After having made a substantial paper profit, who would want to find it quickly vanish as the market reverses its course? The fixed time limit also contributes to the inability of the SES to hold onto long, sustained moves, but it was a desirable feature when testing entry strategies. Finally, the SES lacks any means of attempting to exit a languishing trade at the best possible price, as might be done, e.g., by using a shrinking profit target.

On the positive side, the SES does have the basics required of any exit strategy. Through its money management stop, the SES has a means of getting out of a bad trade with a limited loss. The limit order or profit target allows the SES to close a trade that turned substantially profitable. Using the time limit exit, the SES can exit a trade that simply does not move. These three features make the standard exit definitely better than a random exit or a simple exit after a fixed number of bars.

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