Making the best use of exit option to increase value

Mayur Shah

The outcome of every trade is dependent on the exit. If we enter in a timely fashion and then exit poorly, the trade is likely to be a loss. If our entry happens to be poor but our exit is good we might still salvage a profit. The exits, not the entries, determine the outcome of our trades.

This lesson about exits is easily demonstrated. Take any entry strategy and begin combining it with different exit strategies. You will quickly see that we can change the results dramatically by making only minor adjustments to the exits.

In fact, it becomes nearly impossible to tell if an entry is any good because the results are so exit dependent.

Bad exits can make a good entry look bad and good exits can make a bad entry look good. When testing the validity of an entry method it is best to begin by simply exiting the trades after a number of bars.
If you do anything more creative than this simple exit you will find that you are really testing your exits, not your entries.

If you change the exits while attempting to test an entry strategy the results will vary so much depending on the exits selected that you will find that you can not make any valid assumptions about the reliability of the entry. When combined with the right exit the entry strategy looks great. When combined with the wrong exit the same entry looks terrific.

The purpose of an entry is to get the trade started in the right direction. To test the effectiveness of an entry we simply measure what percentage of the time it gets our trade started in the right direction.

For example, if we have entry "A" that has 60 per cent winning trades after five days it is better than an entry "B" that has only 45 per cent winners after five days. You will notice that we made no comparison of risk or profitability in picking the best entry.

What if entry "A" lost money and entry "B" made money? Is entry "A" still better?

The answer is "Yes" because the purpose of an entry is merely to get the trade started in the right direction.

After that everything else is dependent on the exits. Entry "B" just happened to make more money because of the particular exit we selected for the test. We can easily adjust our exits and we will find that entry "A" will consistently make more money than entry "B" because it gets the trades started in the right direction more often.

To maximise our profit we need to combine the right entry with the right exit. The major uptrend of the market is still not confirmed as though the Sensex has been staying above its earlier bottom, which it has made on 16th April of 3096, it has still not been able to make a higher stocks in the Indian Pharma sector has already taken a lead.

There is a rise in the activity in the automobile sector and investors will now have to look at the new sectors, which are likely to bottom out and move ahead. We had already seen that this sector was not dropping as sharply as the other sectors did in the decline since April.

The relative strength of many stocks in this sector are bullish. More stocks are likely to bottom out and investors must concentrate in this sector.

A few articles back, I had discussed about the pharma sector that has been staying just above the 30 WMA and has been facing a resistance at the 1180/1200 level.

The stock is currently in an intermediate uptrend and with the rise in the activity in the pharma sector, the stock is poised to breakout of this big trading range and once this happens, it will lead to strong surge on the upside giving investors and traders an excellent opportunity to get into the stock.

The relative strength line for the stock has been staying above the zero line even as the stocks was moving sideways as the indices was dropping and hence the relative strength remained bullish.

Now with the rise in the activity in the pharma sector, the stock seems poised to breakout out of this strong resistance and once this happens, the major trend f the stock will turn up and the stock will move higher. Investors must get into the stock on a breakout above this strong resistance line.

Dr Reddy’s is in a major uptrend as the stock rose smartly in the past few weeks and moved past its earlier intermediate top to make it to the all time high territory. The stock has been staying well above its rising 30 WMA and investors must hold on to the long positions.

Any pull back by the stock towards this long term moving average must be used by investors to add to their long positions. The relative strength line is well above its zero line indicating that the stock has been outperforming the indices. With many stocks within this sector being bullish, investors and traders must continue to remain invested in this sector and must get into these stocks in an intermediate correction.

Traders must trade this stock on the long side. Ranbaxy has been in a strong intermediate rise since the past few weeks and the current intermediate uptrend also confirmed a major uptrend for the stock as the stock broke out of its earlier intermediate top and moved past its 30 WMA. The relative strength line for the stock moved above its zero line and is now bullish indicating that the stock is outperforming the sensex.

The breakout above the 550 level was an excellent point to get into the stock and investors must add to this long position on any pull back towards the 30 WMA in the next intermediate decline. As the major trend of the stock has turned up, higher levels are likely to be expected soon. Sun Pharma has been staying sideways since the past one year as the stock has been facing a strong resistance at the 640 level.

The stock has been oscillating between 400 and the 600/640 level giving intermediate term traders a good opportunity.

This oscillation by the stock has been taking place about its 30 WMA and investors must get into the stock only when the current sideways trend will frustrate the investor.

A breakout of this sideways move with a rise in volume will give investors and traders an excellent opportunity to trade on the long side. Thus keep a track of this stock.

Wockhardt has moved up smartly in the last week and has moved very close to its 30 WMA which is still declining.

The earlier intermediate top is still will be up. However investors must stay sideways for some more time and once the major trend of the stock is confirmed, they can enter into the stock in the next intermediate decline or a pull back towards its 30 WMA. However, they must continue to keep a tack of this stock.