Exit When the Trend Changes? Not So Fast!

• Posted by Greg Harmon
• on February 5th, 2014

I wanted to spend a few minutes on an issue that is becoming relevant with the pullback in the market. When do you exit a trade? There are many different styles of trading: trend following, based on momentum, tape reading, fundamental analysis and following price action to name a few. Faithful readers here know that I design trades and then execute them using what I see in the charts. My process starts with identifying the trend and then searching for stocks that have a good set up in the direction of the trend. As a top down technician my process starts with identifying the trend. We look for the trend first and and then for stock set ups that go with that trend. The thought is that over 70% of stocks move with the trend so if you can identify it you have a much better chance of success in your trade. I am not unique in this part of my process. From there traders can vary and you can read more about my process in my book.

But take this concept as a given for a moment. That you should buy stocks when the trend is rising and and selling short when the trend is falling. The unwritten piece of information that needs to be added to this process is that it is intended for new positions. New long positions in a rising trend and new short positions in a falling trend. But what is often confused is that when the primary market trend changes some traders want to close their positions. This is just wrong! Once you have entered a position the broad market trend does not matter to that position. Your process then needs to shift to the parameters of that particular stock. The stop loss that you put in place when you first created your plan. That makes sense right. If the market is falling but your Express Scripts ($ESRX) long position is rising or not falling through your stop loss why would you close it? The trend is important for entries and the stock itself is important for determining exits.

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