How to Exit an ETF Trade

Today I was planning on following up on yesterday's lesson in ranking stock sectors, but because the market is so overbought I thought it would serve us best to look at how to exit positions, especially in a bull market.

In the Model Portfolio of my Daily Battle Plan, we have taken exactly 50 trades over the past 12 months and the track record has been 42 winning trades and 8 non-winning trades (84% of the trades have been profitable). All have been in ETFs and the trades have been done both on the long side and the short side. Every trade scaled-in on pullbacks on the long side and exited into strength (on the short side we shorted into the strength and bought back into the selling). This is a fixed formula and philosophy I've traded with and have written about for the past 14 years.

The exit we primarily use for long ETFs is when the ETF closes with its 2-period RSI of more than 70, the position is exited. That's it and it's backed by many years of statistical results.

On Monday we had two positions, one in [SPY|SPY] the other in [FXI|FXI]. Each came close to triggering an exit signal on the close Monday, especially FXI. But the 2-period RSI was below 70 on each. Some traders may have exited early and if the market had turned down on Tuesday, they would have looked correct for the trade. Those many traders that waited another day though were well rewarded as SPY and FXI closed significantly higher on Tuesday and triggered sells on the close. The profits were locked in and now we're in cash waiting for the next round of signals.

Yesterday (Wednesday) the market was basically quiet. But as I'm writing this on Thursday morning, the market is called to open much higher taking an overbought market condition to even more overbought.

The question is "did we exit too early?"

In hindsight, it may be so in this trade for at least today. But if you look at thousands and thousands of simulated trades going back more than a decade, you'll see that exiting with RSI levels between 60-75 has been opportune to lock in gains and exit positions. As I tell everyone, no one exit strategy consistently sells at the top. The goal is to sell into high probability exit zones, which means selling into strength.

Our testing shows that the 2-period RSI in the 65-75 zone is on average a wonderful place to exit short-term trades. Sometimes the ETF and stock will rise further and sometimes it will immediately reverse lower. The key is that you are using the same philosophy over and over again. You're scaling into ETFs and stocks as they pull back to predetermined levels and you're selling into strength, again into pre-determined levels. You're trading like the specialists and market makers have done for decades and you're even going a step further. You're using structure, discipline, and quantified behavior to guide you each day. And as you can see from the performance of the Daily Battle Plan Model Portfolio, along with the success that market makers and specialists have had for decades, its the single best way to trade each day, especially when you're trading ETFs.

Buy on the pullbacks at pre-determined levels, and sell into the strength, again at pre-determined levels. It's a proven formula for trading success.

If you'd like to learn more on how to trade like this, I'll be conducting a presentation today (and also next Wednesday) on a Professional ETF Trading Course I'll be teaching in late October. If you'd like to attend the free presentation, please click here.