Why Profit-Based Exits Need a Price Forecast

Summary

The document considers a rule for gradually selling shares as a stock rises: sell portions at successively higher prices so the remaining holding’s dollar value stays roughly constant. It asks whether this approach balances gains and risk when the future upside is uncertain. The response argues that decisions based only on past and current profit and loss do not provide a rational basis for choosing an exit; a trading strategy needs some forecast of future prices. Without such a forecast, it says, holding no exposure is the rational default.

The response identifies two exceptions: a trader may value the entertainment of gambling, or may need to reduce exposure to avoid a margin call on a leveraged position. It provides no quantitative evaluation of the proposed sell schedule, empirical evidence, or comparison with other exit rules. Its central point is therefore a conceptual caution, not a tested conclusion about how this particular schedule performs. The rule’s usefulness depends on a view about future prices and the investor’s constraints.

Key ideas

• A schedule that sells shares as prices rise changes exposure but does not itself forecast future prices.
• The response argues that a trading decision based on profit and loss alone lacks a rational predictive basis.
• It presents zero exposure as the default absent a forecast, subject to utility and leverage constraints.
• Reducing exposure can be rational when it helps prevent a margin call on a leveraged position.

Tags

# trading exit strategy


# trading exit strategy












I have the following exit strategy under consideration.

Suppose I have n shares of stocks that I want to sell. When the price reaches n/(n-1) of the original price, I sell 1 share. When the price reaches n/(n-2) of the original price, I sell another share ...

Basically when the stock price increases, I keep on selling the shares one by one to keep the dollar amount of the stock constant.

This seems to balance the profit and risk, especially when I am not sure how much gain I can have in the stock. But I don't have a quantitative assessment of this strategy.

Has this strategy been studied already so that I can know when this strategy is a good one and when it is not a good one? If so, could anybody show me the analysis of the pros and cons of this strategy?

## Answer by Michael Isichenko (score 7)

https://quant.stackexchange.com/a/67967

There can be no rational trading entry or exit strategy based on your pnl, i.e. a function of past and current prices. The only way to make a "strategy" is to predict, one way or another, future prices. Without predictions, the most rational action is to have zero exposure. An exception is when a trader extracts a utility from the thrill of gambling. Another situation when exiting a position based on recent pnl is rational is to avoid a margin call on a levered position.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.