Exit rules specify, in advance, the price or condition at which a trade is closed for a loss (the stop), for a win (the target), and any rule that moves the stop while the trade is open (the trail).
Target audience: Traders who have a defined entry but manage exits by feel, and want exits that bound risk and let winners run.
Exit rules specify, in advance, the price or condition at which a trade is closed for a loss (the stop), for a win (the target), and any rule that moves the stop while the trade is open (the trail).
The exit, not the entry, usually decides a system's expectancy. The stop sets the risk unit that every result is measured in, and the win-side exit determines the payoff. Two systems with the same entries and different exits can have opposite expectancy.
The distance from entry to stop is one R, the unit every outcome is measured in. Place the stop where the trade idea is wrong, not where a round dollar amount sits: beyond the structure that invalidates the setup, or a multiple of recent volatility (for example 1.5 times the average true range). Then size the position so that distance equals your fixed percent of equity. The stop and the sizing are one decision: choose the level first, size second.
A fixed target (say +2R) raises win rate and caps the upside; it suits systems whose edge is a reliable, bounded move. A trailing stop gives up some win rate (more trades stop out near breakeven) in exchange for occasional large winners; it suits trend systems where the fat tail is the edge. There is no universally better choice. The exit must match the shape of the move the system is trying to capture, and the backtest tells you which fits.
You cannot maximise both win rate and average win at once; the exit trades one for the other. Tight targets win often but small; wide trailing exits win rarely but big. What matters is the product: expectancy equals win rate times average win minus loss rate times average loss, all in R. A 35 percent win rate with a 3R average winner beats a 60 percent win rate with a 0.8R winner. Design the exit for expectancy, then make sure you can psychologically hold the version you chose.
Entry fixed. Exit A: +2R target, win rate 45 percent. Expectancy = 0.45*2 - 0.55*1 = +0.35R per trade. Exit B: trail by 1 ATR, win rate 32 percent, average winner 3.5R. Expectancy = 0.32*3.5 - 0.68*1 = +0.44R per trade. Same signals, but the trailing exit harvests more of the trend and wins less often. The R-multiple sequence over many trades, not any single result, is what reveals this.
Setting the stop at a fixed dollar amount instead of where the idea is wrong.
Sizing the position before choosing the stop, so risk per trade drifts.
Moving a stop further away to avoid being stopped out.
Comparing trades in dollars when position size changes, hiding the real edge.
Choosing an exit you cannot actually hold through, so live results differ from the test.
Myth
That a higher win rate always means a better system.
Reality
No paired reality note provided.
Myth
That a tighter stop is automatically safer regardless of where structure sits.
Reality
No paired reality note provided.
Myth
That the win-side exit barely matters compared with the entry.
Reality
No paired reality note provided.
Take your last 20 trades and convert each result to an R-multiple, then compute expectancy.
This lesson is educational content only and is not financial advice. Trading involves substantial risk. A tested process improves decision quality and survivability; it does not predict the market or guarantee any outcome. Trade only with risk you can afford to lose.