Stock Market · Trading Systems

Defining exit rules

Exit rules are harder than entry rules, and matter more. You can have a mediocre entry rule with great exit rules and be profitable. The reverse is rarely true.

The three exits every trade needs

1. STOP LOSS: defines maximum acceptable loss

2. TARGET: where you'll book profit

3. TIME STOP: when you'll exit if neither target nor stop is hit

Stop loss methods

• ATR-based: 2× ATR below entry. Adapts to volatility.
• Technical: just below recent swing low or key support level.
• Percentage: fixed % (e.g., 5%). Simplest but ignores volatility.
• Time-based: exit after N days if not moving in your favour.

Target methods

• Fixed risk-reward: target = 2× the risked amount
• Technical: next resistance level or measured move
• Trailing stop: let winners run by moving stop up as price rises
• Volatility-based: target = 3× ATR move from entry

Trailing stops, the underrated tool

A trailing stop locks in profits as the trade moves in your favour. Example: stock at ₹500. Trailing stop at ₹490 (₹10 below). Stock rises to ₹520. Trailing stop moves to ₹510. Stock falls to ₹510 → stopped out at +₹10.

> Most exit failures aren't about the stop. They're about overriding the stop. 'It'll come back' is the most expensive sentence in trading.

Time stops

If a trade hasn't moved meaningfully in 5-10 days, the thesis is failing. Time stops force you to close stagnant positions and redeploy capital.

The hierarchy

1. Stop loss = mandatory, always set in advance

2. Target = mandatory, defines the trade's expectancy

3. Time stop = optional but powerful

4. Discretionary exit = last resort, never the default

Takeaway. Exit rules matter more than entry rules. Every trade needs a stop loss, target, AND time stop defined in advance. Trailing stops let winners run while protecting profits. Never override a stop. "it'll come back" is the most expensive sentence in trading.