For me, entering a new position is all technical and research driven. If I can answer “YES!” to the following questions, I’m most likely going to go on for the ride:
“Is the stock a solid company?”
“Is the setup easy to identify and the breakout clean?”
And very importantly, “Do I have risk space for this trade?”
If all of the above, I’m in.
There’s more of an art to an exit strategy. As investors, we do all this work and research, watch for setups, and wait for the right breakout. The last thing we want to do is exit too early (and miss our profits), exit too late (and miss our profits), or lose control of our risk tolerance.
Between 2012 to 2016, ASH was an excellent example of how our emotions were tested. I can see two separate storylines. First, is the incredible runup between 2012 to early 2015. Secondly, sadly (and painful to watch) is the dismantling of the stock from early 2015 onwards.
ASH was a darling from 2012. What made the remarkable rise even more beautiful was the simplicity of the technicals. With price bars clustered so close together, it was effortless to spot the trendline and multiple support levels. This was a true, “set and forget” setup; one that many authors would write in charting textbooks.
Only one instance, October 2014, where we can see price test and briefly pierce the support level – perhaps an exit signal for some investors to take profits. Unfortunately, looking back now, the guys who did exit in October 2014, would have also missed the final parabolic rise between December 2014 to June 2015. Ouch. You can’t win them all. Exit triggers can be hard!
If you did stick around till 2016, where could have been some smart exit signals? Let’s look at a few.
What makes the parabolic run up in late 2014, challenging to navigate is because here, for the first time, price is elevating away from the trendline. While it is tough to exit at the top (because you never know where the top is), the best we can do is watch for signs of weakness.
To help us, let’s draw in a few more lines. The next line we can draw is the trendline of resistance (or envelope the price in a channel). Though it’s not the prettiest of channels, it does capture most of the price moves.
We can start to see some clues. Do you see how the price hits the upper channel in early 2015, and then the bars begin to repel away from the trendline? That could be a weakness in price action, and some may even exit here.
Let’s say you’re more of an “I want to exit on a support level failure” type of guy; we have something here for you, too. Zooming into the price congestion that took place in late 2014 to early 2015, we can see price bobble up and down around the $58 support level. Finally, in May 2015, price breaks the support level – another apt opportunity to leave the scene.
Notice how this support level exit price is roughly at the same level where price reversed off the channel. Some may see this coincidental, and maybe it was. But perhaps the smart money just needed another opportunity to exit – as this “coincidentally” turned out to the be final elevator before the stock dropped after May 2015.
Now that’s a conspiracy theory!
Another exit strategy is when the channel envelope starts breaking down. Below, we see the noticeably bearish candlestick as price falls through the trendline and away from the channel. This is the first time that price is starting to deteriorate and that the trend that was intact from 2012 is starting to show signs of cracking.