About Exit Strategies

It’s all about the exit. The sell point actually determines the final outcome of an investment. However, even savvy investors have a difficult time deciding when to sell. They may get nervous and sell a winner too soon — or hold losers far too long. Some set “mental” stops and then fail to execute them. Others use trailing stops only to find themselves “whipsawed” out of a stock just before it takes off for a big gain. A good exit strategy applied consistently lets profits run while providing downside protection to minimize losses.

Common Exit Strategies

“I have heard conflicting theories regarding what percent I should be using for my stops…Thank you SmartStops for making it so easy.”

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Why Is SmartStops Better?

Traditional exit strategies however can be difficult to deploy and time consuming to maintain. As a result, most conventional exit strategies fall dismally short of their intended goals. Not SmartStops. Using SmartStops couldn't be easier. SmartStops automatically determine the optimal exit for each stock in your portfolio and maintains those exit triggers, adjusting them each market day based on current market conditions. SmartStops are calculated and published daily and are optimized for each equity and for each day. They are designed to allow for normal price movement while alerting you quickly when abnormal weakness is detected. During periods of strength, SmartStops intelligently back away to provide more room to run and avoid whipsaw. During periods of weakness, SmartStops intelligently tighten to get you out early in a down trend. Once a risk alert is issued, SmartStops continues to monitor the equity and alert you when subsequent signs of elevated risk are detected.

With SmartStops, you’ll save time and effort and enjoy peace of mind knowing you have an exit strategy in place every day. While most days you may not have to be looking at your stocks, if you receive a risk alert, today is a good day to look at that one. Review the position, reassess the risks and prospects, make an informed decision and take timely protective action.

SmartStops enable you to:

  • Easily maintain downside protection that positions you to quickly react to changing market conditions on a daily basis.
  • Align your exit strategies to short or long term investment goals.
  • Respond quickly to unusual negative price action.
  • Achieve higher rates of return.
  • Drastically reduce the probability of catastrophic losses in bad markets.
  • Better utilize broker capabilities to always be prepared to automatically sell stock before a market correction erodes profits or results in a loss.

“Before SmartStops our clients had to pinpoint their own exit point when setting a stop order. TD Ameritrade offered stop orders, stop limit orders, trailing stops and conditional triggers but clients still had to pinpoint their exit price. Your average investor does not really understand the science behind setting a stop. There are a lot of variables that need to be considered such as the volatility of the stock, technical analysis of support and resistance, etc. The SmartStops proprietary algorithm fills that gap. It helps take the guess work out of their exit strategy and reinforces a disciplined approach to investing and trading.”

- Nicole Sherrod, Managing Director, TD Ameritrade

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Buy-and-Hold

Buy and hold is really not an exit strategy. It is a philosophy that believes price volatility* will even out over the long term in a diversified portfolio of high-quality stocks. In other words, hold a good stock long enough and you will make a profit, including the recovery of any losses accrued over the short and medium term.

Concerns with buy-and-hold

  • Investment funds are continually tied up.
  • You may not have a long enough investment horizon to ride out down markets.
  • Losing stocks in a buy-and-hold portfolio can offset winners.
  • There are clearly times when a stock should be sold, but if investors are not paying attention opportunities to mitigate risk will be missed.
  • Sell decisions are often influenced by emotion and other factors that lead investors to make irrational decisions.
  • Buy and hold is often the default consequence of not having an effective exit strategy.

Many investors simply become dependent on buy-and-hold because they lack the time, experience, and resources to establish an effective strategy. SmartStops are a superior alternative to buy-and-hold because it allows quick, accurate response to market fluctuations that erode profits or result in unexpected losses. Selling instead of holding through downtrends allows you repurpose funds and achieve greater returns.


Trailing Percentage Stops

Some knowledgeable investors protect stock positions with an exit that trails prices by a fixed percentage. A decline by that percentage triggers an exit. Trailing stops typically range from 8% to 25%. The same tactic can be used with a fixed dollar figure.

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Concerns with trailing percentage stops

  • Trailing stops do not adjust to changes in market direction and volatility. They only adjust in one direction—up. This often results in premature exits or the whipsaw effect.
  • As stock prices climb, stops based on percentages move too far away from the price and fail to protect profits. In other words, a 10% exit on a $10 stock is not the same as a 10% exit on $100 stock or a $200 stock.
  • Once a percentage exit point is reached, new stops are not automatically calculated.

Broker Recommendations

Brokers are often better at suggesting when to buy than when to sell. Moreover, the brokerage business faces natural hurdles to the sell evaluation and execution process.

Concerns with brokers

  • Successful brokers may have 500 or more active clients with large portfolios. This means monitoring thousands of stocks to maintain exit strategies—a very time consuming task even with automated tools.
  • Brokers often lack training on exit strategies and seldom have the tools needed to closely follow trends and take decisive action when it counts. Unfortunately, it is not uncommon for brokers to suggest selling a stock only after bad news or when they want you to buy something else.
  • Even if brokers had the time, knowledge, and tools to closely monitor stocks, it would be impossible for them to respond with timely exit signals for every client. Do you know where you are on the priority list when your broker decides its time to sell?

SmartStops provides an objective, analytical perspective that can augment broker recommendations. Your broker can use SmartStops to achieve more consistent results and a higher total return on your investments. Have your broker contact us to learn more about programs designed for them.


Technical Analysis

Technical analysis (TA) is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends1 . Its basic premise is that price reflects all relevant factors before an investor becomes aware of them through other channels. Technical analysis can be applied to calculating exit points, but it is typically not for the casual investor.

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Concerns with technical analysis

  • For the average investor, TA is simply too complicated to master and apply.
  • Technical analysis is more suited for traders who are willing to commit the time required to use it properly.
  • There are a variety of components such as moving averages, moving average convergence/divergence (MACD), trend lines, support/resistance points, and Fibonacci retracements that need to be considered when using TA to create exit points.

SmartStops incorporate TA, proprietary analytical models, and years of market experience into a tool that is easy to use for any investor regardless of knowledge or skill level. It can serve as a guide to the casual investor as well as complement the efforts of a seasoned technical analyst.