A Strategy Without Exit Rules Is Not a Strategy

An exit rule is the part of a strategy that turns a position into a decision: a condition described in advance plus an action described in advance. Without such a rule, only the entry remains a strategy, and everything else is decided by the mood on the day when the price has already moved away. That is why the set of ideas "I buy solid companies and hold them" is not a strategy: it gives no answer to the question of which observable event makes the position cease to exist and where the money goes after that.

What exactly an exit rule does

Formally, an exit rule consists of several mandatory parts: a condition that can be checked without argument; an action that follows from the condition; the data source against which the condition is checked; the time when the check is carried out; and a description of what counts as an exception. If any of these parts is missing, the rule does not work — it turns into an intention.

Verifiability matters more here than cleverness. "I will exit if the financial statements get worse" is an intention: everyone reads a deterioration in their own way. "I will exit if, in the next report, revenue in the segment for which the security was bought stops growing" is a rule: it can be checked against the issuer's financial reports page, and the question is closed without any internal negotiation.

Exits differ in nature, and they get confused

Different rules answer different questions, and a conflict between them is usually what leads to none of them being triggered.

• Price-based exit. The condition is framed in terms of a level or a drawdown, and the action is to close the position in full or in part.
• Time-based exit. The position exists until a date or an event arrives; it is convenient to tie it to the corporate events calendar.
• Weight-based exit. The security is sold not because it is bad but because its weight in the portfolio has grown. This is the fixed-weight rule: rebalancing mechanically sells what has risen and tops up what has lagged.
• Thesis-based exit. The reason for the purchase has disappeared — the position is closed regardless of the current price. This is the hardest rule, because it requires writing down the reason honestly on the day of entry.
• Need-based exit. The money is needed outside the portfolio. What applies here is a withdrawal strategy, not a trading decision.

Why the exit is the decision that is made worst of all

An entry is a decision taken in a calm state: there is no position yet and nothing to lose. An exit is a decision taken when already at a loss or already in profit, that is, at a moment when a person systematically assesses the very same thing differently. The typical asymmetry is well known: there is an urge to take a profit early and to hold a loss until the reversal, and each individual departure from the plan looks like a reasonable exception. A rule is valuable not for its precision but because it was adopted in advance — before the number on the screen began to influence the assessment.

If there is no rule, someone else will apply one

A leveraged position always has an exit rule; it simply belongs to someone else: the level, the order of closing and the execution queue are set out in the broker's terms and in the trading rules, and forced liquidation happens without your consent — this is examined in detail in the article on margin trading. The same applies when someone else manages your money: there the discretionary management rules are in force, and it is important to read them before they are needed.

A withdrawal rule is not the same thing as an exit rule

The two are constantly mixed up. An exit rule answers when to close a specific position. A withdrawal rule answers how much the portfolio pays out to its owner over a period — and the well-known 4 percent rule relates precisely to the second question. A withdrawal rule may require selling assets even if no trading condition has been triggered; the reverse is also true. They need to be written down separately, otherwise living expenses start to disguise themselves as a trading decision.

A built-in exit: a cash flow instead of a sale

A separate way of not selling on a mood is to build the portfolio so that part of the return arrives by itself. A dividend strategy shifts the question from "when to exit" to "what to do with the incoming cash", and the payout calendar makes the timing observable:

Upcoming payouts and the history by issuer can be checked in the dividends section. Coupon-bearing securities — OFZ in particular — also have a maturity date built in: the exit date is set by the terms of the issue.

Someone else's example of a rule that requires no forecast

The state solves a similar problem, and solves it mechanically: the fiscal rule sets aside part of commodity revenue at a threshold fixed in advance, without guessing the future price. The value of the design lies exactly in its refusal to forecast. The same logic is available to a private portfolio: the condition and the action are described in advance, and execution does not depend on an opinion about the market.

How to write down your own rule

• Step 1. Write down the reason for the purchase in one verifiable sentence — this is the future condition for a thesis-based exit.
• Step 2. Choose the nature of the exit: price, time, weight, thesis. They can be combined, but then describe the order of priority.
• Step 3. Name the data source and the time of the check. A rule that has nowhere to be checked is not a rule.
• Step 4. Describe the action in full: what is sold, what portion, and where the money goes.
• Step 5. Record what counts as an exception, and forbid yourself to invent exceptions on the day the rule is triggered.

Costs and tax are part of the rule too

An exit is not free. The realised result goes into the 13%">tax base for investment transactions, and frequent triggers increase commission costs. A rule that looks neat on a chart may turn out to be expensive once this is taken into account. This article contains no data on which formulation of an exit has historically proved more profitable: the comparison depends on the instrument, the horizon and the costs of the particular investor, and to promise a result here would be dishonest.

What an exit rule does not do

It does not protect against a loss — it only makes the loss one that was described in advance. It does not raise returns. Its job is narrow: to remove the need to decide a hard question at the moment when deciding it is hardest. The remaining definitions are in the glossary, and current quotes and the composition of the market are in the stocks and bonds sections.