Share Market Toolbox
The long-term buy-and-hold investor
contemplates selling an investment position.
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Why should we consider implementing an exit strategy, and not just buy-and-hold?
We know that a market correction, or even a bear market, comes around too often, and that it can be very prudent to capture profits and protect capital at various times through the economic cycle. Not convinced? See more details about corrections and bears...
Don't forget that the opinions
and emotions of market participants
Reasons for exiting
When we exit from a position it could be for one of a number of reasons including the following:
Exit strategy options
Regarding the detail for an exit strategy, there are many different approaches that can be considered, and they tend to fall into the following general categories which are briefly explained below, with more detail available (see the relevant links below and at right):
The common "percentage fall" approachThis approach is commonly used by investors who don't understand the usefulness of spotting support and resistance levels on a price chart. But is it at all useful?
Selling on price weaknessFor many people, it makes sense to sell on price weakness. but how do we spot this?
Time, clock or calendar-based exits
There are a number of possible considerations regarding the time of day or day of the week that tend to be a little easier for decision-making regarding exits, or even entries. Perhaps the most useful time-based approach is the situation where a price does not advance as expected, hence the opportunity cost of holding the position means it might be best to sell and invest elsewhere.
Price target exits
Many investors and traders have the view that as the share price rises there will be an upper price level where a rising share price might pause, or even sell off. Assuming that this will pan out, the intention is to take some profit by closing a part of the position, or even the whole position. This involves setting a price target, based on some specific criteria. In some cases, the investor might close the position at this price level regardless, and then feel good about holding the profits, while others will be cautious as the price approaches that level and will be quick to sell only if the price hesitates.
There is another situation where investors utilise a price target. And that is in consideration of the Risk/Reward Ratio. Many investors consider this ratio before entering an investment so that they can avoid those positions that might have a low reward for the amount of money being put at risk.
The list of options includes: overhead resistance (on the price chart), the Measure Rule, a round price value (such as a whole dollar amount), or utilising the ideas of Elliott Wave, or of Gann.
Money-based exits (based on the share price value)
There are several exit methods that can be used to set an exit price based on the recent share price action - basically a simple Stop Loss. Some of these options include: a straight percentage of price (not this commentator's suggested option), stop loss at recent price chart support, or a Fibonacci extension.
Price chart feature, and chart tool, exits
There are a number of ways that an exit strategy can be determined based on features of the price chart that may result in the stop loss value changing from day to day. These might be features of the price chart, or utilising a simple tool on the price chart (but not an indicator). Some of these possibilities include:
Price chart indicator exits
Many people like to follow the action of a chart indicator such as the Moving Average (MA) on a price chart, and note whether the price is above or below the MA (as per Stan Weinstein's approach). Even though this is an application of technical analysis, many people use it without considering that it is technical analysis. Some of the possible technical analysis chart indicators that can be utilised to help identify a potential exit include the following:
Other exit approaches
Here is one exit strategy that does not readily fit into the above classifications. It is based on compiling a list of candidate stocks, and then applying a ranking to each stock, and sorting the list by rank. If the available investment capital is not enough to invest in every stock on the list, then only invest in those stocks at the top of the list. If a currently held stock is listed further down the list, then sell it and redeploy the funds to buy a stock which is further up the list.
Why not use fundamental analysis to exit a position?
This question gets back to the basis for our use of technical analysis - the fact that the opinions of the market participants are summarised in the price charts (as stated above). Many investors agree that almost all of the information that we need is already in the price chart, so there is little need to consider the Pandora's Box of fundamental analysis. That is, any intrinsic value, or fair value, of a stock is mostly not relevant.exit strategy approach can be very useful, and in many cases can be based on a feature on the price, or utilising a technical analysis tool.
How do some people do it?
Following is one example approach to exit strategies (with no guarantee that it is useful or successful in all market conditions, nor in the hands of other traders or investors).
I believe that in times of market uncertainty (as seen at least in the 10 year period from 2007 to 2017), it is difficult to have a simple exit strategy that utilises just one, or even two, considerations. This makes it difficult to automate the process. The price chart at right shows several technical analysis observations that can be used (click on the chart for a larger version), including:
For more information on this topic, see the list of references in the column at right...
The information presented herein
opinions of the web page content owner, and
are not recommendations or endorsements of any product, method, strategy, etc.
For financial advice, a professional and licensed financial advisor should be engaged.