Entries & Exits. Which Are More Important?

[TheNegotiator 13]

An interesting and fairly common discussion we come across in trading is the importance of entry and exit strategies and their impact on risk. Lots of traders it is true, look for entry systems with high success rates in picking great turning points or likely trend continuation points where you aren't likely to endure much heat. More and more though, people are suggesting that entries have little to do with their success or failure and it is the exit strategy which makes all the difference for them.

 

I'd like to hear from people their view on either or both entries and exits.

 

My idea is that anyone who says one is more important than the other is underestimating the impact of both. I believe that they must work in a system in conjunction and are just as important as each other. For example, what do you think would be the average success rate of a short(ultra short say fx on a 1min intraday) term trend system where you have 99% of days with a range of 100 prices or fewer and you buy after a rally of 100 prices? Or if you have a system with a fixed number of prices to exit at which is not adjusted for volatility or near price structure which could alter the expected move size?

 

What do you guys think about this?

[TheNegotiator 13]

I guess it can really depend on what you're trading and in what timeframe. Some days you really just need to catch a good entry point early on then let the market do the work for you. But clearly you have to be able to identify when you have one of those days. Day traders are also artificially contained in a time bracket also where as markets work until supply/demand dynamic changes.

[avir4tg 10]

I've always believed that "trade management" is most important. A good entry can become a loser, just as a bad entry can become a winner. It all depends on how stop loses and profit stops are managed.

 

Sorry for the grey answer. If I had to vote I'd go with exits since they represent both loss and profit stops.

[pbylina 10]

They are both important. Consistency is important.

[horace 10]

All I know is that without an ENTRY there is no need of an EXIT and so one is dependent upon the other, but the reverse does not apply.

[TheNegotiator 13]

I think it is true that both are important. I wanted to think more deeply about this as I think that it is true that all too often, people have little effective planning for exits. Mostly to do with targets rather than stop losses. How many times do traders finally have a trade get onside and they get a great feeling when it gets to their target and fills them, only for the market to storm past and show them what they missed out on?

 

But also I would reiterate that unless you find a good entry point, you are potentially risking more. The market does not care what your account balance or risk tolerance is. It cares what its past and current activity is. So to be 'wrong' in a trade is about where the market is likely to turn from or continue to price-wise. If you get your entry wrong, you will have to have a wider stop for the market to show you where you are wrong.

 

I think that both are important and both need to have attention paid to them. It has frustrated me to see a trend in people saying that entry points are just not that important. Well they are. Maybe exits are more important, who knows for sure. But BOTH are essential IMO.

[ake 10]

In my trading, entry points are important to limit risk and exits tend to drive my P&L.

[Tradewinds 12]

I would say that Entries are 80% percent of trading, and exits are 20% percent. A good entry is very quickly profitable, and that makes life a whole lot easier. It's a lot more fun to manage how right you are and how rich you are going to be, than to manage how bad a mistake you made, and how screwed you are.

[cornixforex 10]

Good entries are one of the key elements of successful trading. Exits are more the matter of managing the trades and fine tuning your strategy.

 

But entries, which provide you an edge in the markets are more important.

[Tams 20]

no amount of risk management skill can make a bad trade good.

 

100% of bad trades begin with a bad entry.

 

100% of good trades that went bad begin with a bad exit.

 

100% of bad exits begin with bad risk management.

 

 

YMMV

[SIUYA 11]

no amount of risk management skill can make a bad trade good.

 

100% of bad trades begin with a bad entry.

 

100% of good trades that went bad begin with a bad exit.

 

100% of bad exits begin with bad risk management.

 

 

YMMV

 

not to be confused with a random trade

[wrbtrader 10]

Generally, it shouldn't matter if Entries are more important or if Exits are more important until someone is having a specific problem with one or the other. Regardless, both are needed and dependent upon each other for success along with other variables.

 

Yet, the reality is that most traders spend most of their time working on their entry strategies in comparison to their exit strategies. Further, usually a trader will spend quality time on exit strategies after allowing profitable trades turn into losing trades, allowing big profits vaporize into a small profit or after seeing too many of their trades results as early exits to then see it continue without them into a big price movement.

 

Therefore, it's possible for exits to be more important to some traders due to current problems in their trading after entry.

[Avarice 10]

If you consider markets to be random in nature (which I don't think they are so hold your horses) it can be demonstrated using Monte Carlo simulations that a trading system that takes random entries is indeed profitable if (and only if) it "lets profits run and cuts losers short". The "letting profits run and cut losers short" part is your exit strategy so we could conclude that, indeed, exits are more important than entries.

 

BUT

 

I don't think that a comparison between the quality of entry setups vs. exits makes a lot of sense. Both are integral parts of a trading strategy and one should not be considered without the other. If your entries suck you can have the best exits in the world yet you'll end up broke, and superbly timed entries will still tank your account if your exits are not working. What's important for consistent success is a system with a good expectancy over time coupled with decent risk management. Entries and exits are a part of both so again, I don't think it's feasible to discuss them without consideration to the other components of a trading system. If one wanted to be a wise ass one could say that the whole is greater than the sum of its parts.

[neoikon 10]

I hear a lot of votes for the "entry" being more important, so I will offer the opposing argument in favor of the "exit" being more important.

 

The main problem that occurs with a "bad" entry, as multiple people point out, is your risk tolerance. I feel it is based solely on the individual trader as to what a "bad" entry is.

 

Take for example, two traders who enter at the exact same spot. One may be scaling into a position over a 10 point range, the other has a 6T stop. If the trade goes 5T against the entry, one trader is sweating, the other isn't blinking. Was it a bad entry? The market doesn't care about your entry. Only the trader cares about the entry.

 

As for the exit. That's where you make money. There is no opinion, as it is pretty cut and dry on whether a trade was a winner or loser.

 

Unless you can grab the extreme low tick and exit on the extreme high tick, you can never grab an entire move. There will ALWAYS be money left on the table, almost by definition. You're only trying to grab a piece.

 

We all know this, at least subconsciously, but we still burden ourselves with "I should've stayed in longer!" If you exit with a profit (consistently, with a higher reward to your risk), then the exit is all that matters.

 

My 2 cents...

 

Daniel

[amatulic 10]

I disagree with most of the responses here. I've written about this elsewhere. I see it this way. You have three independent attributes to trading: entries, exits, and money management.

• Your trade entry determines your initial risk. Entries don't determine winners or losers.
  
• The exit determines your profit or loss on a trade.
  
• Money management (position sizing) determines your overall return and drawdown.
  

Of course, your entry and exit rules must result in something with a positive expectancy. You need all three to maximize your return.

 

Most traders are ruled by fear whether they admit it or not -- that's why they focus on entries so much. It's a psychological need to avoid being wrong. A trader knows (perhaps subconsciously) that a good entry means less risk, and less risk means less chance the trader has to face the uncomfortable fact that he made a wrong decision.

 

-A

[TheNegotiator 13]

A point which is possibly worth making is what is more important to a unprofitable vs. profitable trader and why.

 

I would suggest that most profitable traders are more concerned with exits and unprofitable traders, with their entries. But is that because profitable traders are focussing on the right thing or is it because they have already nailed their entries? I think for many, we use different parts of the brain to enter and exit. Many of the best traders also suggest having a proper plan in place before the trade as when you enter and emotions are involved, all can go to shit.

 

So perhaps it's easier to plan in a logical way for entries before emotions get in the way and much tougher to deal with exits. it'd be interesting to do a study on the parts of traders' brains which are most active at entry and exit of their trades.

[SIUYA 11]

IMHO something that has been written in other threads and here and sums it up perfectly.....

 

it depends on the strategy

 

If you are short term looking for high frequency profitable patterns whereby you are taking quick profit targets, then its likely to be entries that are more important.

 

If you are longer term looking to capture bigger moves, then the exits have more influence.

 

everything is a trade off and if you mix and match poorly the strategies and the exits and entries then you end up baking a chocolate cake that tastes like play dough.

[glittle56 10]

In my experience, entries are of course important and I personally choose market direction based on fundamental drivers. eg if Eurusd is bearish, then I will be looking to short the rallies and only trade in one direction. This analysis requires an understanding of global economic issues and a lot of reading. In this case I find entries to be the easy part.

The exit is not so clear or well defined. For example, you may set a PT of 2:1 with a SL of 50 pips so you are aiming for a profit of 100 pips. The market doesn't know what you want but your retail broker does (that's another issue to overcome), you watch the trade reach 95 pips in profit only to see it turn and hit your SL of 50 pips. Your account has just experienced a nett loss of 145 pips. You have just relinquished a 95 pip profit and turned it into a 50 pip loss. That hurts!

This happens a lot and then causes doubt and fear and you then start to trade emotionally by cutting the trade short of the PT, only then to see the trade exceed the PT by 200 pips.

Now you are feeling that you have lost potential profits and maybe you should let the trade run. This emotion based trading is gut wrenching and trading suicide.

 

I think the plan for exits should be clearly defined in your trading plan and then stick to it.

If you plan to take a set PT of say 50 pips, then the market moves 150 pips, so what, you have your 50 pips profit and you should be happy. Do not lament about lost profit because you will never know when the market will turn.

 

Anyone can backtest a plan, it all looks so simple in hindsight with the completed chart in front of you, but it all falls apart when trading in real time. The pivot point isn't clearly defined until 2 candles later, the technical indicators are lagging, short time frames are too random to be useful or consistent in the long term.

 

I think that whatever exit strategy you use, it must be based on taking consistent, smaller profits, more often and not be sucked into the greed and fear cycles that trading brings out in all of us. You can make a living on 20 pips per day. It just depends on whether you can consistently make 20 pips every day on average and then how much per pip you are trading with. $100/pip x 20 pips = $2000/day. My point is you don't need thousands of pips to be profitable but you must be able to cut losses quickly and bank profits often.

Therefore you need to be decisive, business like, unemotional.

Think of trading as profits and expenses just like any other business. Wins and losses sounds a lot like gambling. In trading, losses are an integral part of doing business just like buying stock in the hope you are going to sell it. You may get stuck with it, but that's the cost of doing business and your profits must outweigh the costs.

Many novice traders beat themselves up when they have a loss but this is the wrong frame of mind to be in. Losses are trading expenses and nothing more.

[smlcap 10]

I would say that Entries are 80% percent of trading, and exits are 20% percent. A good entry is very quickly profitable, and that makes life a whole lot easier. It's a lot more fun to manage how right you are and how rich you are going to be, than to manage how bad a mistake you made, and how screwed you are.

 

Yes...A good entry/start is like scoring 3 runs in the top of the first inning. The sooner you're ahead, the better. Good entry, and I'll cross the exit bridge when I get to it.

The above 80/20 equation sounds pretty accurate to me.

[nakachalet 10]

An interesting and fairly common discussion we come across in trading is the importance of entry and exit strategies and their impact on risk. Lots of traders it is true, look for entry systems with high success rates in picking great turning points or likely trend continuation points where you aren't likely to endure much heat. More and more though, people are suggesting that entries have little to do with their success or failure and it is the exit strategy which makes all the difference for them.

 

I'd like to hear from people their view on either or both entries and exits.

 

My idea is that anyone who says one is more important than the other is underestimating the impact of both. I believe that they must work in a system in conjunction and are just as important as each other. For example, what do you think would be the average success rate of a short(ultra short say fx on a 1min intraday) term trend system where you have 99% of days with a range of 100 prices or fewer and you buy after a rally of 100 prices? Or if you have a system with a fixed number of prices to exit at which is not adjusted for volatility or near price structure which could alter the expected move size?

 

What do you guys think about this?

 

any trader using what you described is doomed from the very beginning....

 

trading is synonymous with flexibility and adjustability. anyone using a fixed price, fixed chart or fixed whatever.... is also fixed to drawdown, inevitably.

 

it appears as you are already a successful trader, why asking a philosophical question on entry and exit.... or perhaps you have already worked out the answer for.... chick or egg first....?

 

any trader without a properly preconceived and predetermined entry and exit point is really just playing and trading for fun and just gambling his capital away.... imho

[nakachalet 10]

In my trading, entry points are important to limit risk and exits tend to drive my P&L.

 

three cheers....

[nakachalet 10]

no amount of risk management skill can make a bad trade good.

 

100% of bad trades begin with a bad entry.

 

100% of good trades that went bad begin with a bad exit.

 

100% of bad exits begin with bad risk management.

 

 

YMMV

finally, u r openning up....

 

there is hope around here.... lol

 

i like your trading philosophy.... too....

[phantom 16]

 

any trader without a properly preconceived and predetermined entry and exit point is really just playing and trading for fun and just gambling his capital away.... imho

 

Sorry nakachalet, but your statement couldn't be farther from the truth.

 

Ever heard of a floor trader?

 

Some of us professional traders react to price action on a daily basis.

 

In my trading, and I know many other pros who do the same, I wait for consolidations and then trade the breakouts. I let the ongoing price action determine my entries and exits, as I trade from consolidation zone to consolidation zone, adding contracts at some points, subtracting contracts at others.

 

Its akin to surfing the market waves.

 

Granted, I am much more experienced at this technique than many other traders, but I would rather react to price action than go in blindly at some price level and hope I reach some other price level to achieve my financial goals.

 

Traders that are "doomed" are the traders who do not have the ability to take what the market gives...

 

 

Luv,

Phantom

[TheNegotiator 13]

nakachalet,

 

What I am trying to illustrate is that many guys who don't know better, are told they should focus on this or focus on that. In actual fact, you need to focus on everything. Because if you don't, a professional who is better prepared than you will take your money.

 

Planning should be done pre-trading as to what you are looking for from the day. Before entering a trade you must assess whether you believe the potential move would make the trade worthwhile given your tolerance level(whilst the market couldn't care less what this is, you have to. fact.). Then when you have identified a favourable entry it's important to judge the market around the area you're looking at. Up to this point, you should have spent more time on your entry. You have prepared for entry, identified risk and are preparing to pull the trigger. If you haven't done any of the above you are asking for a hiding imo. So right now entry is more important. If you haven't paid attention to your entry, you'll probably often see your trade go well under water before you exit and it turns. More than likely you'll get out at the turn or within a price or two. Then the market will rampage in the direction you'd decided was most likely.

 

Once you are in the market though, clearly exits should be the imperative for you. You have to judge how the market is moving, adjust your exit points, trail your stop or whatever you do. If you don't, you'll end up taking smaller winners than your identified potential and thereby skew your risk. Plus you'll probably have trades which get either really well on side or maybe to within a price or two of your target(please notice at this point I have not mentioned fixed targets or anything of the sort, but each to their own), only to see the trade turn around and not only not make you money but lose you money.

 

When you get all of these minor but critical things wrong, it is going then to be a psychological struggle. You think that you're right, so right yet why can you never make money?! Damn the market. It's designed to tease and torment you isn't it! No. Of course not. But people who do fully prepare all parts of their trading are the ones who will likely profit consistently over an extended period of time.

[Tradewinds 12]

I wait for consolidations and then trade the breakouts. I let the ongoing price action determine my entries and exits, as I trade from consolidation zone to consolidation zone,

 

The consolidation zones are not predetermined by a price level, but you have predetermined that you will wait for those as a condition. Isn't that predetermined? Mentally predetermined? You haven't predetermined a price target, buy you have predetermined a condition.

 

nakachalet was probably talking about set price levels? Which is quite different.