Stops and exits

Where a stop belongs

Folder 3 taught the reading skill: a demand shelf holds until a daily close through its floor breaks it. This lesson turns that reading into a rule for your own money. A stop belongs just beyond the level that proves the idea wrong — for a stock bought because a shelf held, the stop is the close below that shelf’s floor. Not a round percent under the entry. Not where the loss becomes uncomfortable. Where the reason for owning it stops being true.

Placement by percent feels tidy and is quietly arbitrary: 5% under the entry might sit in the middle of a healthy shelf — a level the chart expects price to revisit and hold — and the trader is stopped out by ordinary noise on an idea that never broke. Placement by level ties the exit to the evidence. It also sets Lesson 19’s stop distance, which is why the stop is chosen before the size, and both before the entry.

The two exits

Every planned trade has two exits, and both are written before the entry. The exit on proof: the level breaks, the idea is dead, you leave — no committee meeting, no ‘one more day’. The exit on strength: the idea worked, price travels toward the supply shelf overhead (Folder 3 again — ceilings are where sellers have actually shown up), and you take some or all of it there, per the plan, rather than inventing a new, higher hope mid-trade.

Beginners plan neither and improvise both, which produces the classic pair of errors: winners sold in a panic at the first wiggle, losers held through the level, the thesis, and the following month. The two-exit rule is not sophistication. It is simply the refusal to make the two biggest decisions of a trade at the two worst moments to make them — frightened, and euphoric.

One honesty the whole doctrine depends on: a close is a trigger, not a price. This course’s exit on proof fires on the daily close through the level, and the position then exits at the next session’s available price. Most days that price sits near the level. On a gap — an earnings shock, a halted open — it can sit far below it, and the realized loss exceeds the planned distance. That is why Lesson 19’s sizing treats the distance as the planned risk rather than a guaranteed one, why the budget is small enough to survive a worse fill, and why the journal you keep records the realized loss in R — never the planned one.

Three ways to run an exit

The exit on proof can be run three ways, and they are not interchangeable — each one trades a different risk for a different kind of certainty.

A stop-market order rests with the broker. The moment price trades at or through the stop price, it becomes a market order and sells at the next available price. Its strength is that it acts without you, intraday, while you are at work. Its weakness is that the fill price is whatever the market offers at that moment: on an ordinary dip, near the stop; on a gap down — an earnings shock, a halted stock reopening — the first available price can sit far below it, and the loss runs well past the planned distance. It executes; it does not promise a price.

A stop-limit order adds a floor: once the stop price is touched, it becomes a limit order to sell at the limit price or better. The floor controls the worst price you will accept — and that control is exactly its failure mode. If price gaps straight through the limit, or falls and never trades back up to it, the order never fills at all: you keep a position whose idea is already dead, at a loss still growing while the unfilled order sits there. Nonexecution is not a malfunction of this order type; it is the design.

The close-based rule — this course’s rule. No resting order at all. The trigger is the daily close through the level, as in Folder 3’s reading, and the exit happens at the next session’s available price. It refuses to be shaken out by a brief intraday poke through the level, and it fits a working day: the decision is made once, on the close, not watched tick by tick. Its cost is the mirror of the stop-market’s: the exit price is the next session’s, unknown when the trigger fires, and an overnight gap can put it far from the level — the gap risk Lesson 18’s small budget exists to absorb.

None of the three removes the gap. They differ in when they act (on a touch, intraday — or on a close), in whether execution is likely at all (the stop-limit may never fill), and in who must be present (only the close-based rule asks a decision of you, and it asks once a day). A plan names one of them, in advance, like everything else in this folder.

Moving a stop

Of all the ways a plan dies, this is the quietest. Price approaches the level; the trader, unable to watch the idea be proven wrong at the agreed price, moves the stop a little further away — and in that instant, the trade on the screen is no longer the trade that was planned. Its risk is larger than Lesson 18 allowed, its size (Lesson 19) is wrong for its new distance, and none of it was decided calmly. A stop you move away is a stop you do not have.

There is one honorable direction. Once a trade has worked — price has traveled, the first shelf overhead is behind it — moving the stop toward safety, up under the new structure, only ever reduces risk. That is the plan extending itself, and it is written into the plan in advance like everything else: where the stop starts, and the condition under which it may move closer. Never further. Ever.

The exit is part of the entry

An option position (Lesson 16) carries a third exit the stock trader does not: the calendar. Expiry approaches whether the idea is right or not, so the option plan names a date — out by this day, whatever the chart says — alongside the level. The shape is the same: exits are properties of the plan, decided when the position does not exist yet and its owner is still honest.

That is the whole doctrine, and it is deliberately unglamorous: a trade whose exits are not written down is not a planned trade at all. It is a position its owner will negotiate with, live, at the worst moments, against an opponent — the market — that never negotiates. Write the exits. The entry is the last line of the plan, not the first.

Practice

Work this fictional scenario on paper. A stock was bought at $60 because a demand shelf held; the shelf’s floor is $55, so the planned distance is $5 a share, and the plan runs the course’s close-based exit. On Monday the stock closes at $54. On Tuesday it opens at $51. (1) What does the close-based rule do, and at about what price? (2) What is the realized loss a share, against the $5 planned? (3) What would a resting stop-limit order at $55 have done on Tuesday’s open? (4) What would a resting stop-market order at $55 have done?

Work it through: (1) Monday’s close through the floor is the trigger; the position exits at the next session’s available price — about $51. A close is a trigger, not a price. (2) $60 − $51 = $9 a share — the gap made the realized loss larger than the planned distance; planned risk is not a promised maximum. (3) It would have triggered on Monday, the moment price traded through $55, and — price having traded at $55 on the way down — ordinarily filled there. A stop-limit strands you only when price gaps straight through the limit without ever trading at it; here the level was crossed in ordinary trading the day before the gap. (4) It would have triggered on Monday, as price traded through $55 on the way to the $54 close, and sold at the next available price — near $55, a day before the gap. Execution without a promised price, but on Monday’s tape, not Tuesday’s $51.