TRIED & TRADED
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Exit 5 — the technical exit

  • A technical exit closes the trade when the underlying does something you named before you opened it.
  • It is the only exit on the list that looks at the stock rather than at the position.

What it is

  • You name a condition on the underlying — a level broken, a moving average crossed, a close beyond a line.
  • The condition ends the trade, regardless of what the position is worth.
  • It is a thesis exit. You are closing because the reason you opened it has gone.
  • It is checked on the underlying’s data, which is cleaner and more reliable than option quotes.

Why anyone uses it

  • A credit spread opened because a stock was holding above support has a stated reason to exist.
  • When the stock closes below that support, the reason is gone.
  • Waiting for a price-based stop means paying for the same information later and more expensively.

What makes it different from a stop

Technical exitStop loss
WatchesThe underlyingThe position
Fires onA named market conditionA stated loss on the trade
Can fire in profitYesNo
Affected by a volatility spikeNoYes
  • The two often fire at similar times, which is why they get treated as the same thing.
  • They aren’t. A technical exit can close a trade that is currently winning, because the thesis broke before the price did.
  • And it ignores a volatility spike that leaves the stock where it was — the situation where a stop is most likely to fire for nothing.

Where it bites

This is the exit most likely to make a backtest lie to you.

The line has to exist before the trade does

  • A support level drawn from the whole chart includes bars that hadn’t printed when the trade opened.
  • An exit tested against that line is reading tomorrow’s paper.
  • It is the single most common way a technical rule looks good in a test and fails in life.
  • We have shipped this fault ourselves and it is written up under What Went Wrong.

And “broke support” is not a specification

  • Intraday touch, or a close beyond?
  • How far beyond — any amount, or a stated buffer?
  • Which line, chosen how, and how far back does it look?
  • Answer all three and it becomes testable. Leave any of them and two people get two answers.

Common questions

Is a technical exit compatible with a purely mechanical strategy?

Yes, as long as the condition is fully specified — the level, the timeframe and the confirmation. If it needs you to look at the chart and decide, it can’t be tested.

Which technical signals are worth using as exits?

That is an open question and one worth separating from entries. A signal that makes a poor entry can still make a good exit, because the two jobs are different.

Does the exit have to use the same signal as the entry?

No, and forcing it to is a habit rather than a principle. There is no reason the condition that gets you in has to be the mirror of the one that gets you out.

Can a technical exit fire while the option position is profitable?

Yes, and that is the point of it. You are closing because the reason for the trade has gone, not because the money has.

How this shows up in our tests

No technical-exit result is published yet, and there is a reason to be careful here.

Any run using price levels has to prove the level existed on the day the trade opened. Until that check is built into the capture, this site will not publish a technical-exit result — a rule that quietly sees the future produces the best backtest on the page and the worst live experience.

The hub

The seven ways
to exit

Compare with

The stop
loss

The umbrella

What is an
exit rule?