Determine your exit criteria and heed the signals

Here are the charts from a couple of recent trades where nicely developing uptrends were quickly reversed.

The first is of German stock Balda which was in a decent steady uptrend until price stalled, before a sharp intra-day spike down on 11 October led to my stop being hit. This was frustrating, especially as price moved back up as quickly as it went down. However, a couple of days later price fell again below that intraday spike low. Price actually fell back to the initial entry level, which would have eliminated all the hard-earned profits.

The second is of UK stock Globo. As you can see, this had a lovely uptrend which generated decent profit until price stalled earlier this month, before finally generating a sell signal a few days ago. Yesterday, the drop accelerated as price fell by 20%.

In both cases, by properly placing the trailing stop, we got out with some of our profits intact. By definition, trend followers never get out at the top of a move - there is always an element of giving back profits before your stop is hit. But by the same token, you want to give the stock sufficient room to breathe, and do not want to risk getting stopped out on a minor pullback or retracement. The question that each trader has to answer is "how much is too much?"

There are differing views on when to exit positions - some prefer to exit as soon as a particular price level is breached (like me), some wait for the end of the current trading day, others wait until the following day's open. None of them are wrong. But there is a right method for you.

Whatever your chosen method, the danger for some traders would be to override these signals, especially if they have got emotionally attached to a trade. The trader would have set the entry and exit parameters, so why would they fail to heed the signals that they themselves have created???

My own rationale is that, similar to entering a new position on the immediate breach of a price level, I treat my exits in the same fashion.

This is partly as a result of reading Larry Hite's comments in Market Wizards:

"When a market makes a historic high, it is telling you something. No matter how many people tell you why the market shouldn't be that high, or why nothing has changed, the mere fact that the price is at a new high tells you something has changed."

Taking that as my cue, when price hits a new low, then to me something has also changed. By trading trends using a systematic approach, then new highs and new lows automatically highlight when something has changed, by identifying either the end of an existing trend, or potentially the start of a new one. 

Therefore, similar to the two examples shown, the fact that these stocks were in uptrends before starting to hit new lows said to me that something had changed. My stop levels were breached, which was the trigger for me getting out of my positions.This is also why I do not enter any positions on a pull back or retracement. One man's retracement is another man's trend reversal...