It Pays to Have an Early Exit Strategy

Boris Schlossberg

One of the scariest moment of my life happened when I was ten, when the KGB cut off the head of my teddy bear before they allowed us to board the Aeroflot flight from Moscow to Vienna, delaying the plane on the tarmac for over an hour. Of course they found nothing inside, but it was just the final message on our way out of the old Soviet Union.

My mother, who has the beauty of Catherine Deneuve and the steely sangfroid of Vladimir Putin remained stoic throughout the ordeal, but as the plane finally lifted off the ground she let out a tear.

She had survived two tense years of waiting to emigrate which included snatch and grabs off Moscow streets and endless rounds interrogation by the KGB. But in the end she finally engineered her greatest exit. We left the miserable mess of a country that was the Soviet Union and started a new life in America, where I was able to grow up and prosper beyond our wildest dreams.

My mother is the master of the exit. She is utterly unsentimental when it comes to making the needed change in herself or others and never wavers in her resolve. A while back after she had not seen me in a few months she simply looked at me up and down and as a way of greeting said, “Bob – you are fat and you will die and leave your children fatherless if you don’t lose this weight right now.”  Mind you I had gained a whopping five pounds, but needless to say they were gone within a month.

mother-and-sonLike all Russians she harbors no illusions about human nature, and basically believes that people are incapable of fundamental change, but can improve through minor behavior modification.

She taught me the single best way to diet, a method that she used herself to shed 25 pounds at the age of 78 after surgery had made her immobile for a while. Her trick? Leave 10% of the food you eat on the plate and ultimately work your way leaving 25%. That’s it. Just do that every meal and I guarantee you will lose weight better than any diet you have ever tried.

My mother’s diet trick is simply just another example of her exit strategy, but thinking about it I realized that in a very ironic way it has also been responsible for all my trading success this summer. Just like my mom I am the master of the early exit, except in my case instead of shedding pounds I have been gaining pips all summer long.

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Those who trade with me in the chat room know that I am the worst when it comes to early exits. I almost never honor my take profit targets. I will blow out of the trade at the earliest hint of trouble. The net result is that many traders in my chat room trade my strategy far better than me, but no one in the room trades it more accurately. Since May of this year I’ve had only one full losing trade in more than 190 trade cycles, and that occurred post Brexit when I foolishly decided to trade the GBP/USD.exit1

Nothing looks uglier or more pathetic than my trade runs which sometimes show 2.9 pips, 3.4 pips and so on per trade. But those pips add up and more importantly my early exits often get me out of losing situations which in the end are far more important for my strategy. Indeed, I think that it’s really trading’s little secret. Good traders are really masters of the exit.

If you trade the insurance model, like I do, which depends on many small wins and few large losses then early exits are key. Just think back to the real insurance industry. In the term life insurance business, 40% of customers forget or unable to renew their premiums. Insurance companies love that. It allows them to collect all the reward without assuming any of the risk. It’s the real insurance world of an early exit.

If, however you trade the lottery model of many small losses and few large wins, then your exit strategy must be the exact opposite. You have to exit as late as possible in order to make up for the multitude of losses you will incur.

Option-Trading-StrategiesSince I don’t trade the lottery model, I’ll leave it to others to comment on its inner workings. However, I do have an idea of why traders fail in the insurance model and it all goes back to my mother and food.

Just think how simple her advice is and yet how hard it is for most American’s to follow. In a land of all-you-can-eat buffets do you really think most people can leave any food on the plate, much less part of their first serving?

Las Vegas casinos exploit this weakness for all its worth, by offering gamblers free drinks, food, anything to keep them gambling because they know that no matter how much a person may be up, they will always try to go for more and will inevitably go bust. In short Las Vegas, is basically a multi-billion dollar bet on the fact that you are incapable of an early exit, and that’s certainly reason enough to believe that it’s a good strategy.

Until next time,

Boris Schlossberg

Mr. Schlossberg is  the managing partner at BKForex  and creator of the new course The ULTIMATE Forex Trading Course produced in conjunction with Weiss Educational Services. He is also a weekly contributor to CNBC’s Squawk Box and a regular commentator for CNBC Asia and CNBC Europe. His daily currency research is quoted by Reuters, Dow Jones, Bloomberg and Agence France Presse newswires and appears in numerous business publications and newspapers worldwide. Mr. Schlossberg has written articles on trading for SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is the author of Technical Analysis of the Currency Market and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game, both of which are published by Wiley. Boris’ extensive experience in trading and developing momentum based techniques provide the foundation for BKForex strategies.