The Importance of an Exit Plan in Trading and Investing. If DIYQuant did not have an Exit Plan, this would have Happened...

Singapore market has not been doing well since the start of this year, impacted by the ongoing trade war and the exodus of funds from emerging markets. Many investors suffered losses during this period. Unfortunately nobody knows exactly when this turmoil is going to end or if it's going to get worst.




Should I cut loss or hold it out?
One common question investors like to ask when the market drops is "Should I cut loss or keep holding and wait for the market to recover?". By this question alone, I already know that the person who asked does not have a proper trading plan in place. To me as a systematic trader, it is already too late to ask this question when the market has turned against you. In fact it is already too late once you have already initiated the position. The exit plan you come up with before and after taking a position can be very different. For me, it is a prerequisite to enter a trade with an exit plan already in place. Thanks to my automated quant trading system, the entry and exit plans are already put in place by the system whenever a trade is initiated, leaving no room for error due to human's forgetful mind.

What prompted me to write this post is the recent plummet of 800 Super Holdings Ltd (SGX:5TG). This stock bagged me a 55.83% return last year and was one of my best trades in 2017 (check out this post). However, the stock fell 33% in the last 5 days and is 50% below its high recorded in mid 2017.  Fortunately the system exited once the trend reversed but it became a stark reminder to me of the importance of having an exit plan. If, for whatever excuses I did not actually cashed out in July 2017 when the trend turned against me, I may still be holding the stock and sitting on a significant loss (capital as well as opportunity cost). If you look at the chart, the price has been falling ever since the system cashed out after the trend has reversed.

Another one of my best performing stocks Health Management International Ltd (SGX:588) did not end in a good state either after the system cashed out. This stock generated a 49.40% profit last year. Subsequently, the stock whipsawed until now.

A final example, Jadason Enterprises Ltd (SGX:J03). This is my worst performing stock so far, It made a loss of 16.39%. As seen in the chart, if the system did not cut loss when the trend reversed, I will be looking at a loss of more than 60% now!

From the few examples above, I hope you can appreciate better the reason why I kept emphasizing on having an exit plan. In a weak and choppy market like what we are experiencing in Singapore now, it is easy to be caught holding a beaten down stock. Without a proper exit strategy, it can be tempting to want to 'hold it out' in hope that the price will rebound when the market recovers. One thing to remember is that every 10% drop in price requires a 11% rise to get it back to the original price. Every 20% drop requires a 25%. For a 50%, it will be an astounding 100%! You can do the math by yourself for the rest. And we wouldn't know how long the market will stay depressed. That's the reason why a short term trader can turn into a long term investor as he desperately hold on to the stock and eagerly wait for the price to recover, which may not happen after all and losing the opportunity to grow his money elsewhere.

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