Exits: Targets, Stops & Time
Exits drive most of a strategy’s result. The three families and how to combine them.
If entries are overrated, exits are underrated — they drive most of a strategy’s real-world result. There are three broad families of exit, and how you combine them shapes the strategy’s entire personality.
- Profit target — exit at a set gain. Locks in wins but caps your upside (bad for trendThe prevailing direction of price: up, down or sideways.-following, fine for mean-reversion).
- Stop-lossA pre-set exit that caps your loss if a trade goes wrong. — exit at a set loss. Caps the downside and defines your risk; essential for survival.
- Time exit / signal exit — exit after N periods, or when the original signal/thesis reverses (e.g. drops out of the momentumBuying recent winners and avoiding recent losers. rank).
The deep point: your exits define what kind of strategy you actually have — far more than your entries do. The same entry, with different exits, becomes a completely different beast. Pair a momentumBuying recent winners and avoiding recent losers. entry with a tight profit target and you’ve built a mean-reversion-like, win-small strategy that *kills its own edgeA repeatable, structural reason your trades win over time. by cutting winners short. Pair the same entry with a trailing/signal exit that lets winners run* and you’ve built a true trendThe prevailing direction of price: up, down or sideways.-follower with the win-small/win-big profile momentumBuying recent winners and avoiding recent losers. needs. The classic, fatal mismatch is capping winners on a trendThe prevailing direction of price: up, down or sideways. strategy — you amputate exactly the rare huge gains that make the whole expectancyThe average profit or loss you can expect per trade. positive. So choose exits to *match the edgeA repeatable, structural reason your trades win over time.*: trend edges need exits that let winners run; mean-reversion edges need targets that bank the snap-back. Exits aren’t an afterthought — they’re where the strategy’s soul lives.
Common mistakeSlapping a tight profit target on a trendThe prevailing direction of price: up, down or sideways.-following strategy “to lock in gains.” That cuts off the rare giant winners the edgeA repeatable, structural reason your trades win over time. depends on, quietly turning positive expectancyThe average profit or loss you can expect per trade. negative. Match the exit to the edgeA repeatable, structural reason your trades win over time. — don’t cap winners on a strategy that lives off them.
ExampleMomentumBuying recent winners and avoiding recent losers. entry + 5% profit target: wins often but tiny, and misses the multi-baggers — expectancyThe average profit or loss you can expect per trade. collapses. Same entry + “exit only when it leaves the top momentumBuying recent winners and avoiding recent losers. decile”: a few trades run 40–80%, paying for many small losses — the trendThe prevailing direction of price: up, down or sideways.-following profile that actually works. Identical entry, opposite outcome, decided by the exit.
Key takeawayExits drive most of a strategy’s result, in three families: profit targets, stopA pre-set exit that caps your loss if a trade goes wrong.-losses, and time/signal exits. They define the strategy’s personality — trendThe prevailing direction of price: up, down or sideways. edges need exits that let winners run, mean-reversion needs targets that bank the snap-back. The classic killer: capping winners on a trendThe prevailing direction of price: up, down or sideways. strategy.
FAQs
Should every strategy have a stop-loss?
Almost always have *some* defined risk, but the form varies: a stop-loss, a signal-based exit, or position sizing that bounds the loss. What matters is that your downside per trade is controlled and known. The profit-target and time-exit choices should then *match your edge* — but uncontrolled, open-ended downside is rarely acceptable.