Oct

12

Exiting Trades, from Craig Mee

October 12, 2010 |

Exiting trades is always the toughest part of the game for me on a speculative basis, especially wanting to book trades to protect P and L, after taking a few hits. But what I find interesting is some trades are easier to let run than others with the same risk on the board. And it will come as no surprise to all that these are the low volatility plays… but what is it? Realistically the high volatility are the trader's saviors, and can turn a 3 bagger into a 8 bagger in a heartbeat. These are precisely the ones we should be putting on the risk and shutting down the screen. But hey the risk of scratching in a heartbeat is only too real as well, and there lies the trade off.

Alan Millhone writes:

The late Tom Wiswell said, "keep the draw in sight" at the Checker board. Knowing when to execute a trade at the board certainly carriers over to stock trading and knowing when to liquidate your position on the board or at the big board.

I spent this past week in Medina,Ohio as referee for a world title "Free Style" Checker match of 24 games between reigning Champion , Ron "Suki" King of Barbados and challenger Dr. Richard Beckwith of Ohio. I know a little about Checkers and watching these two Grandmasters all week was quite a treat.

Games one through twelve were all drawn and the players knew when to liquidate their position and make effective trades to exist the game. Suki "changed up" in game 13 and won as Dr. Beckwith stuck around too long and got into trouble by not having an effective exit strategy and lost.

I sat and witnessed game 22 as Dr. Beckwith improved on an ending that Suki and the late Derek Oldbury of England played off another opening that transposed into the line of play that was used in game 22. After 4 hours and 22 minutes Dr. Beckwith emerged as the victor after a hard fought ending that Suki could not escape. Dr. Beckwith had previously studied this ending that arose in game 22 and knew how to win the ending. Hand held notes as the Chair admonishes at the Checker board or the big board are critical to survive.

Suki drew game 22 and won the final game with an odd line of the "Tillcoultry" opening that Dr. Beckwith failed to meet correctly and did not trade out early enough and lost on a ending bind that he could not escape.

"Knowledge is power" on both boards. I was a first hand eye witness to this all last week watching these two greats do battle over the checkered squares.

As Chair points out, there are direct correlations to board games and stock trading and stock exit strategies that will help keep you unscathed.

Phil McDonnell writes:

One strategy I use with certain option spreads is something I call stop profit exit. I talked about it in my book. For strategies such as butterflies and calendar spreads the profit peaks out at a certain definable point relative to the underlying asset. For many ratio spreads there is a peak profit but that point changes dynamically with time. The point is that deciding to get out at the peak profit is a no brainer. Once it hits that point you will give money back if it goes up or down from there. The exit can and should be should be mechanical.

The probability of touching a price target is governed by our old favorite the arc sine distribution. Because of the Reflection Principle the probability of the target being touched is twice that of it being above (or below) that target at the end of a given time period.


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