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1997issue C031-4

Precommit an equity-risk cap and a profit-retracement exit

The archive ranks an exit that keeps average expectancy per unit risked high, a position size that matches stated objectives, and the discipline to follow both above security selection and timing. It writes a capital-loss exit inside a 3% equity-risk cap, replaces that stop with a profit-retracement exit once a profit objective is reached, and scores each session by whether those written rules were followed.

  • The archive ranks an exit that keeps average expectancy per unit risked high, a position size that matches stated objectives, and the discipline to follow both above security selection and timing.
  • The 3% equity-risk cap is a maximum adverse move for one position, not a plan to take 33 full losses. In the $100,000 example, that cap is a $3,000 capital-loss exit, or a $15 decline on 200 shares bought at $150.
  • Once a profit objective is reached, the initial loss cap is replaced by a profit-retracement exit, illustrated as giving back 30% of open profit or as a 5% to 10% pullback of total equity.
  • A daily rule audit treats adherence as success even on a losing day, because the need to be right postpones a planned exit and can leave a net deficit even when most trades win.
Entries in this reading3 entries
Current trackTrailing exit18 readingsTrading psychology process53 readingsStop-loss order144 readings

Process before selection

The archive ranks three process items above security selection and timing. The first is an exit that keeps average expectancy per unit risked high. The second is a position size that matches stated objectives. The third is the discipline to follow both.

Write a capital-loss exit

A stated rule of thumb is never to allow more than 3% of capital to decline in any one position before exiting. That 3% figure is the equity-risk cap: the largest share of account equity one position is allowed to lose before a forced exit.

The capital-loss exit is the prewritten price or dollar threshold that closes the position so the decline stays inside that cap. In the $100,000 account example, a 3% cap is $3,000. Two hundred shares bought at $150 therefore require an immediate exit after a $15 decline.

Switch to a profit-retracement exit

Once a profit objective is reached, the archive switches the exit from the initial loss cap to a profit-retracement exit. That later rule allows a stated fraction of open profit, or of total equity, to reverse before the remainder is closed. The archive illustrates the switch as giving back 30% of open profit, or as exiting after a 5% to 10% pullback of total equity.

Applied to 3,000 shares that had risen from $50 to $200, the 30% profit giveback implies about $135,000, or a $45 drop, after which the archive says the position should be closed.

The need to be right postpones the exit

The archive argues that needing every trade to be profitable leads people to ignore an exit and hold a loser. That need to be right is the urge to avoid realizing a loss, which postpones a planned exit and recasts a short-term position as an unplanned long hold.

The same habit can produce a net loss even with a high win rate. A 100-trade illustration of ninety-five $100 wins and five $10,000 losses still leaves a $40,500 deficit.

Score the day by the written rules

The archive requires a daily rule audit: an end-of-session review that scores whether written size and exit rules were followed, independent of profit or loss. Adherence is treated as success even after a losing day. A breach is to be mentally rehearsed so it is less likely to repeat.

Editorial reading of the two stages

Editorial. The archive's own switch trigger is a reached profit objective. TradersWeek groups that switch with the opening equity-risk cap so both exits exist as written instructions before the position is open, then lets the daily rule audit grade the session by adherence rather than by that day's result.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
6 of 18 in the Trailing exit track
19981-6 pp.Next on Trailing exitExit stops before entriesWrite the exit plan before the position exists, because market risk is already on once the trade is open.
All readings on this track · 18 readings
  1. 1988Constructing a mechanical trend system with independent trailing exits
  2. 1991Write a staged RSI exit book with trailing stops
  3. 1993Evaluating filter-trigger trailing exits after breakouts
  4. 1995Weekly-close breakout entry and trailing exit in Eurodollars
  5. 1996Evaluating moving-average turn entries and slope exits
  6. 1997Precommit an equity-risk cap and a profit-retracement exit
  7. 1998Exit stops before entries
  8. 1998Exit rules evaluated with a fixed random entry
  9. 2002Construct the stay-or-flatten decision before entry
  10. 2006Audit the stop, trail, and risk-reward stack as one procedure
  11. 2007Building a momentum system with relative strength and trailing exits
  12. 2013When buy and hold needs a sell rule
  13. 2013A mechanical trend toolkit that turns screens into one entry-exit procedure
  14. 2014Is a two-period relative strength index, a channel breakout, and a trailing exit one long-only procedure?
  15. 2016Trend-aligned option entries and trailing exits
  16. 2017Monthly three-black candles as a trailing exit
  17. 2018Evaluating profit-taking and reentry in trend following
  18. 2020Treat the zigzag threshold as a volatility-scaled construction variable
By fieldEntry and exit rules206 readingsBy year199756 readings
All 18 readings tagged Trailing exit
Also on Trailing exit5 readings
1998Exit stops before entries1998Exit rules evaluated with a fixed random entry2002Construct the stay-or-flatten decision before entry2006Audit the stop, trail, and risk-reward stack as one procedure1988Constructing a mechanical trend system with independent trailing exits