Other Kinds of Stops – Signal, Time, Targets, Execution

In the previous articles, we discussed a number of stop strategies which are based on price action. However, other exit strategies exist that can be implemented. Those are based on a particular technical signal or also based on time.

Signal Stop

It is an obvious stop indication. Signal stop usually occurs when the system provides a signal to enter into a position, which is in the opposite direction from the existing position. It is a part of the so called stop-and-reverse system.

Time stop

As time and reward to risk are multidimensional in their essence, a time stop can be used in short-term trading when time, cost of money and opportunity cost are relevant. This stop is usually purposed to enable a trader to exit his/her position at a certain time after an entry has been made. If no profit is achieved within the time window, the probability of it not occurring in the future increases. Therefore, the position needs to be closed, if the trader is to avoid additional risk. A largely used variation of this strategy is to cut the size of the position, after a certain time passes. It is meant to diminish the risk and also to allow the position room to produce some profit.

Targets

To exit at a target price could be used as an exit strategy. In the case of short-term trading money targets are commonly used. “If I gain $250 on this trade, Ill make an exit” is a common scenario. Traders may test their targets, as long as the target calculation method is easily quantified. At a longer-term target, the size of the position can be reduced or trailing stops can be tightened with the help of money stops or volatility adjustment. A combination of target and time stop can adjust the target prices as time passes. It diminishes the probability risk to increase, as time affects profits. Target levels should be set alongside a trailing stop, if one is to avoid losing profits he/she already achieved, in case a target level is not reached by price action.

Support and resistance is a powerful concept used by traders to read and interpret price action and to set targets. It is based on the theory that the price may struggle to break above a certain resistance level or below a certain support level. A trader can use this in order to determine profit levels. If one has entered into a long trade, key resistance areas can be a good place to set profit target levels. If one has entered into a short trade, key support areas can be a good place to set “take profit” levels.

Another effective way of working out take profit levels is to use daily range levels. To identify daily range levels, a trader may use the average true range indicator (ATR). It shows exactly how far one can expect a price to move on any given day, based on recent price movements.

Execution

Execution risk strategies are useful again in short-term trading, where profit margin often is related to executed prices and slippage. Entry execution is based on the timing the system provides a signal. Exit execution may allow experimentation. One should exit his/her trade near the close of the day, in order to protect himself/herself from overnight risk. The opening of a trade is usually a more emotional moment, which can be both advantage or disadvantage.

Another way to execute an entry or an exit is scaling. This is practiced more by institutions, which hold large positions, but it can prove to be equally useful for a smaller-sized trader, if, of course, he/she can afford to operate with more than one standard lot. Scaling generally means to enter or exit a position over time in small amounts. More about scaling could be found in our next article.