Most traders spend the bulk of their development time on entries. Which setup to take, which indicator to use, which timeframe to scan. The exits – the part of the trade that actually determines your profit or loss – get a fraction of that attention. Linda Raschke has been saying this for decades, and her view has not changed: trade management is the most neglected aspect of system development.
Linda needs little introduction to serious systematic traders. A market professional since the 1980s, she has traded futures, equities, and managed money at the institutional level, was featured in Jack Schwager’s Market Wizards, and has taught thousands of traders her approach to reading market structure and managing positions. This episode marked Better System Trader passing one million downloads on iTunes – a milestone episode with one of the show’s most respected guests.
The conversation covers how to model different exit types, how to think about trailing stops without giving back too much, the role of volume in setting the day’s tone, and how to use market breadth as a filter for trade decisions.
Watch the full episode below, then read on for the complete breakdown.
Why Trade Management Is So Neglected
Linda identifies two reasons. First, entries are fun – they feel creative and active, and there is an obvious signal to react to. Exits are messier. “If it was so clear cut that it was time for us to exit, you would certainly be reversing your position – and it’s not that way.”
Second, most traders underestimate how concentrated gains actually are. Linda applies the 80/20 rule directly: approximately 80 percent of your gains will come from 20 percent of your trades. You cannot predict which trades those will be, so your exit approach needs to be structured as an actuarial table – a probabilistic framework – rather than a prediction about each individual trade.
“Obviously you can have a well-defined entry, but we all know that probably 80 percent of your gains are going to come from 20 percent of the trades and you just cannot predict that,” she explains.
The Three Core Exit Types and How to Test Them
Linda’s modelling process tests each exit type individually before combining them. The three core types she uses:
- Fixed ATR target: What percentage of trades reach half an ATR, one ATR, two ATRs? Higher targets drop win rate but increase payoff. Mapping this relationship – rather than guessing – is essential before committing to any target size.
- Time-based exit: What happens when you exit at end of day, next day’s open, day seven, or day ten? Building a decay curve across holding periods shows whether there is an optimal exit window and whether the edge is robust across a range of holding times.
- Trailing stop: Any trailing method will keep you in on the best trades. But which method – moving average, ATR-based chandelier, parabolic – varies by environment. Linda’s conclusion: no single trailing stop is universally superior. “If I optimised it, one bucket of data might say moving average stop. Another might say volatility-based stop.”
How to Combine Exits in Practice
Linda typically uses two exit types together rather than relying on one. A common pairing is a time-based exit combined with a hard stop far from the market. If a position has not moved after day eight, it is a dead trade – exit it. The hard stop protects against tail events. The combination covers the most common failure modes without over-engineering the exit logic.
She also uses volatility breakout systems as dynamic stops on existing trend positions. When a sharp flush occurs against a trend trade, a one-day volatility breakout triggers an exit. Once that system exits – usually within 24 hours – the original trend direction typically reasserts and the trend position can be re-entered.
Reading Volume to Set the Day’s Tone
One of Linda’s most practical insights: the first 30 minutes of NYSE volume sets the tone for most markets for the rest of the day. This holds across asset classes – futures, commodities, currencies. The reason is that institutional flows tend to cluster: either the large players are present or they are not, and volume in the first half hour tells you which.
- Third week of August, thin markets: low volume signals choppy conditions – tighten exits.
- End of quarter with money flows to deploy: heavier volume, better follow-through – exits can give more room.
Market Breadth as a Filter
Linda uses breadth measures to assess whether a move in price is being confirmed by broad participation or driven by a small number of leading names. Breadth matters for exit modelling because the right exit depends heavily on the market state.
“The problem when you lump too much data together is that you start to lose the difference between the states,” she explains. “In a range-bound market, 80 percent of trades might model out this way – but in a breakout or trend-following environment, they’ll model out completely differently.”
Separating data by market structure before modelling exits produces far more useful results than running aggregate statistics across all conditions.
Relative Strength and Target Selection
Linda uses relative strength to identify which markets deserve capital – focusing on instruments that are outperforming their benchmark. Combining relative strength with a well-defined exit model keeps capital in higher-probability environments rather than spreading it evenly across all setups regardless of their current behaviour.
Portfolio Correlation and Account Management
Trade management also includes correlation monitoring across a portfolio. Linda notes that short-term strategies naturally cancel each other out at the account level when combined thoughtfully – they function as implicit hedges. The strategies did not need to be designed to do this; it emerged from building a diverse collection of setups that ask simple “what if” questions about price and time.
She also emphasises self-management for any trader who is not fully mechanical: the psychological management of open positions, the temptation to override exits based on hope, and the consistency of following a defined exit plan all contribute to the actual realised edge versus the backtested edge.
Related episodes
- Entries, Exits and Trend Following with Larry Tentarelli
- Hedge Fund Manager Andreas Clenow on Trend Following
Get the show notes & transcript
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