The Exit Before Entry System
Every time I buy stocks, my mind always say things like:
“It will go up 20% in less than a week.”
“This is gonna be a bagger stock.”
“I’m sure it will go up.”
It is not entirely my fault for thinking that way, society keeps telling us to—
The result? When I win, I feel like I'm on a par with Jesse Livermore. But when I lose, it makes me want to quit trading. When our expectations are not met, we get frustrated. Intense emotions (e.g. anger, frustration and embarrassment) can lead to irrational decisions.
The tendency is, we are more likely to take riskier trades in hope to get back the lost profit or try to break even.
Risky trades driven by emotions lead to more losses, which lead to more frustration, and then lead to more risky trades, and the emotional cycle goes on and on and on—until you have no more money left to trade.
I found two solutions to this problem. The first one is meditation. Meditation has lots of benefits such as: stress reduction, improves decision-making skills, and improves concentration. Go ahead and google its benefits, I'm sure you will be amazed.
The second one is, going against the crowd. I started trading stocks on May 29, 2015. I started studying the stock market two months before that—I never stopped studying ever since. After 2 years of reading lots of threads in different stock market forums and Facebook groups, watching video tutorials, and reading books, I realized that majority of the players (investors and traders), share the same thought after buying a stock.
"Duh! Of course, they should expect the stock to go up. Why would someone buy it when he/she was expecting it to go down in the first place?"
You may be right, but have you heard of this quote,
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”?
It is from the movie, The Big Short. It made more sense to me after I developed the EBE (Exit Before Entry) system. After years of incurring losses from learning and testing out multiple trading systems, combining, tweaking, fixing, and refining them, I have finally developed my winning system (and by "winning", I mean minimizing losses). If you think that this system will prevent you from losing money, then you are on the wrong page.
Basically, in EBE, I am expecting a stock—that passed the first three phases—to go down and hit my calculated exit price. And that is what I meant by going against the crowd.
You might say,
"That is not going against the crowd, it is common for a trading strategy to implement a stop loss price."
Yes, you are right, almost all trading strategies I've read implement stop loss price, but they gave much more importance in timing the entry. They always put entry first before exit (some "gurus" completely avoid talking about it when hyping stocks), and in the real world, it is completely logical. How can you exit if you are not in, right?
I beg to disagree. Sometimes, what works in the real world does not really apply in the stock market world.
The problem is, the more we give importance in timing the entry, the more we expect a stock to go up. When our expectations are high, the value of having a stop loss will be lesser, if not completely ignored subconsciously. And when everything goes south, emotions will start to cloud our judgment. These are the things that we do when our emotions start to kick in: forgetting/ignoring stop loss, adjusting of stop loss to a lower level hoping the stock will bounce, or adding cash to a losing position instead of selling.
EBE is very counter intuitive, it goes against the crowd. It gives greater importance in calculating exit price than timing the entry. In fact, phase 4 of EBE is unnecessary. I can completely omit that—I don't give much importance in fundamental analysis either. As long as I have calculated my exit price, I can enter anytime I want and still be profitable. Phase 4 is only for efficiency.
I would like to end this article with Mark Twain's quote,
"Whenever you find yourself on the side of the majority, it is time to pause and reflect."
“It will go up 20% in less than a week.”
“This is gonna be a bagger stock.”
“I’m sure it will go up.”
It is not entirely my fault for thinking that way, society keeps telling us to—
The result? When I win, I feel like I'm on a par with Jesse Livermore. But when I lose, it makes me want to quit trading. When our expectations are not met, we get frustrated. Intense emotions (e.g. anger, frustration and embarrassment) can lead to irrational decisions.
The tendency is, we are more likely to take riskier trades in hope to get back the lost profit or try to break even.
Risky trades driven by emotions lead to more losses, which lead to more frustration, and then lead to more risky trades, and the emotional cycle goes on and on and on—until you have no more money left to trade.
I found two solutions to this problem. The first one is meditation. Meditation has lots of benefits such as: stress reduction, improves decision-making skills, and improves concentration. Go ahead and google its benefits, I'm sure you will be amazed.
The second one is, going against the crowd. I started trading stocks on May 29, 2015. I started studying the stock market two months before that—I never stopped studying ever since. After 2 years of reading lots of threads in different stock market forums and Facebook groups, watching video tutorials, and reading books, I realized that majority of the players (investors and traders), share the same thought after buying a stock.
They always think, it will go up.
You might say,
"Duh! Of course, they should expect the stock to go up. Why would someone buy it when he/she was expecting it to go down in the first place?"
You may be right, but have you heard of this quote,
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”?
It is from the movie, The Big Short. It made more sense to me after I developed the EBE (Exit Before Entry) system. After years of incurring losses from learning and testing out multiple trading systems, combining, tweaking, fixing, and refining them, I have finally developed my winning system (and by "winning", I mean minimizing losses). If you think that this system will prevent you from losing money, then you are on the wrong page.
The EBE system has 4
phases:
2.
Volume analysis (green vs. red volumes).
4.
Timing
entry (breakouts).
You might say,
"That is not going against the crowd, it is common for a trading strategy to implement a stop loss price."
Yes, you are right, almost all trading strategies I've read implement stop loss price, but they gave much more importance in timing the entry. They always put entry first before exit (some "gurus" completely avoid talking about it when hyping stocks), and in the real world, it is completely logical. How can you exit if you are not in, right?
I beg to disagree. Sometimes, what works in the real world does not really apply in the stock market world.
The problem is, the more we give importance in timing the entry, the more we expect a stock to go up. When our expectations are high, the value of having a stop loss will be lesser, if not completely ignored subconsciously. And when everything goes south, emotions will start to cloud our judgment. These are the things that we do when our emotions start to kick in: forgetting/ignoring stop loss, adjusting of stop loss to a lower level hoping the stock will bounce, or adding cash to a losing position instead of selling.
EBE is very counter intuitive, it goes against the crowd. It gives greater importance in calculating exit price than timing the entry. In fact, phase 4 of EBE is unnecessary. I can completely omit that—I don't give much importance in fundamental analysis either. As long as I have calculated my exit price, I can enter anytime I want and still be profitable. Phase 4 is only for efficiency.
I would like to end this article with Mark Twain's quote,
"Whenever you find yourself on the side of the majority, it is time to pause and reflect."
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