These Are Tough Exits

Sean McLaughlin
February 23, 2024

Many swing traders and investors are currently sitting on a First Class problem. But it’s a problem, nonetheless.

These traders are sitting in positions with huge open profits.

I can use NVDA as an example. But there are many, many big winning trends still acting well.

Those of us who like to style ourselves as Trend Followers will soon be faced with a difficult decision – how and when to determine when a trend has ended.

It’s easy in hindsight to look at a chart and spot the moment a trend was invalidated and an optimal exit price is clear. But in real-time, it’s not so easy. In fact, it’s impossible. Because contrary to popular belief, no trader can reliably and consistently predict the future.

But the stakes are high in these moments. For a trend follower, the occasional big wins are what we rely on to make our nut.

The life of a trend-following trader can best be described as long periods of near-constant frustration punctuated by short moments of fleeting bliss.

In other words, we get chopped up by frequent false breakouts and false starts, resulting in small loser after small loser, with the occasional small winner mixed in just to keep us addicted to the process. The net result during this time adds up to a lot of nothing. Just churning commissions and frustration to seemingly no end. This is why we need an occasional big win to make it all worth it.

Then we catch one.

At first, we can’t believe it. We’re skeptical. We’re already looking for a level to take profits because we’ve “seen this movie before” and we know the rug pull is coming any minute.

Yet we’re somehow winning the battle against our emotions and we’re continuing to stick with the winning position. Even better, perhaps we’ve added to it.

Any objective (non-trader) person would look at our open profits and say: “Great!”. But not us. Now all we can think about is what an absolute jackass we’ll look like if we let this profit turn around on us and turn this monster winner into a piddling gain – or worse. We’re not thinking rationally, we’re thinking emotionally with our egos. And we’re dragging our baggage of past losses behind us to slow us down. To trick us into taking our profits too soon – before they get away.

Believe me, I wish I could provide you with the perfect algorithm to decide the optimal point to exit a winning trend. None exist (that I know of). But I know two things to be true:

  1. We should wait for price action to confirm a trend has ended. For long positions, this would mean a new relative low price. It would mean we’re moving away from our highs. For shorts, this would mean a new relative high, confirming prices are moving higher off the bottom.
  2. We have to make every effort to be consistent in the application of whatever heuristic we use to exit winning positions. We can’t be shooting from the hip. These exits are too important. We have to have the confidence to act in the same fashion each time. Every time. Practice gets us as close to perfection as we’ll ever come.

Enjoy your big gains when you get them.

But don’t screw up the exit!

Trade 'em Well,

Sean McLaughlin
Chief Options Strategist
All Star Charts, Technical Analysis Research

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