When to Sell a Stock or Position: The Backtested QS Exit Strategy Analysis
When should you sell a stock or position? Many articles and videos deal with when to buy, but less focus is on when to sell. When should you sell? What method should you use to sell? What is the best time to sell a position? How long should you wait until you sell? Let’s look at a straightforward but effective trading rule for when to sell a stock or position.
The best trading rule for when to sell a stock or position is the QS exit: when today’s Close is higher than yesterday’s High.
It’s such an easy sell condition, yet it works very well, and perfectly so, for mean reversion strategies.
We have named it the QS exit (after Quantified Strategies) because we were the first to use this simple but effective sell signal. We have used it for our own trading for over two decades!
Exit trading strategies (when to sell)
Here’s a list of all the exit trading strategies we have covered:
- When To Sell A Stock Or Position (The Backtested QS Exit)
- Sell the Rip Strategy — What Is It? (Backtest)
When To Sell A Stock Or Position? (The Backtested QS Exit)
Before we start: If you are looking for profitable short term trading strategies, you might want to check out that clickable link. We have written over 1 000 articles that contain strategy backtests since we started in 2012.
Let’s look into more detail about the sell rule and why it’s so effective:
Back in 2002, we first started using our best exit for stocks and stock indexes:
When today’s close is higher than yesterday’s high.
Let’s explain:
Today’s Close is the last print of the official trading day, and the High is the highest traded price. In a candlestick chart, it looks like this:
If you were long when the first white body candlestick appeared, you would be selling in the last few seconds before the close (because the close is higher than the highest print of yesterday). Alternatively, if you can’t trade at the close, you might exit on next day’s open.
Let’s show you a chart to illustrate better when we prefer to sell:
The green arrows indicate when we buy, and the red arrows when we sell. As you can see, the red arrows are when the close is higher than the High of yesterday.
Let’s zoom in:
The green arrow signals when we buy, and the next day the stock rallies. The close is substantially higher than yesterday’s high, and we sell at the close for a quick profit.
How did we arrive at this exit?
We did so by backtesting – the cornerstone of all research we do. It’s a straightforward yet effective way of selling a position or a stock.
Why does the QS exit work?
It works best in mean reverting assets like stocks and, to a lesser extent, in bonds, but overall this is a sell signal that works well on most assets (depending on the time frame). In the short term, the best way to trade stocks is to exploit pullbacks in the long-term rising trend and later sell on strength.
The chart below is taken from an article about 180 years of drawdowns:
Why does the stock market go up? This is mainly due to two reasons: inflation and productivity gains. However, the uptrend is not linear, and “panics” and uncertainty make prices go down before they resume the uptrend.
Likewise, exuberance makes prices overshoot, and that is when you want to take short-term profits and sell (if you’re a short-term trader).
Any mean reverting strategy aims to buy when the price deviates from the longer trend and sell when the market is strong. We buy weakness and sell strength. This is the cornerstone of mean reversion!
- Mean Reversion Trading Strategies and Backtest
- What Happens When Stock Markets Are Overbought?
- What Happens When Stock Markets Are Oversold?
Backtest when to sell a stock or position
Let’s show how you can improve your strategy by using the QS exit.
We make the following trading rules to show you how to improve your trading system:
- When the 2-day RSI crosses below 10, go long at the close (buy).
- When the 2-day RSI crosses above 70, sell (or exit) at the close.
The strategy has returned the following equity curve (the blue line is the drawdowns):
It’s 332 trades, and the average gain is 0.67% per trade. The annual return is 7.3% (buy and hold is 9.6%) despite being invested just 20% of the time.
Let’s see what happens when we change our trading rule for when to sell or close our position:
Trading Rules
THIS SECTION IS FOR MEMBERS ONLY. _________________ BECOME A MEBER TO GET ACCESS TO TRADING RULES IN ALL ARTICLES
CLICK HERE TO SEE ALL 350 ARTICLES WITH TRADING RULES
Let’s see what happens:
Not only is the equity curve smoother, but the overall profits increase: the average gain per trade goes up to 0.68%, and the annual return increases to 7.7%. This happens even though we reduced the market exposure (time spent in the market) to 17% (from 20%). The average number of days spent in each trade decreases from 5.7 to 4.8.
Let’s display the equity curve of the two different exits:
As you can see, the QS Exit makes the journey smoother with less drawdowns. Our experience is that max drawdown is an essential metric for most traders, because most abandon a strategy after a few months of losses – exactly when a strategy might turnaround.
The QS Exit shows that trading doesn’t need to be complex or difficult!
The performance after the QS sell signal
Let’s show you the short-term performance of SPY after the sell signal has triggered:
The first column indicates the #days we are holding SPY after a sell signal triggered. For example, the first row shows the performance from the close of the day of the signal and selling at the close the day after. As you can see, the returns are negative the first three days after a sell signal (c>ref(h,-1)) triggered.
Should you use a stop loss?
We learn in books and blogs that a stop-loss is essential. Should you use a stop loss?
It depends. We don’t use a stop loss. Instead, we trade different assets, time frames, market directions, and sizes. We are looking for strategies that complement each other and offset losses.
We have both written an article and made a video about the alternatives to a stop loss:
When To Sell A Stock Or Position? Conclusions
The QS Exit is a standard exit criteria for most of our strategies. It’s simple buy yet effective. Simplicity is all you need in trading!
FAQ:
When should you sell a stock or position?
Knowing when to sell is crucial in trading. The QS exit rule suggests selling when today’s close is higher than yesterday’s high. This straightforward condition is effective for mean reversion strategies. The QS exit is a sell signal based on the condition of today’s close being higher than yesterday’s high. It’s named after Quantified Strategies.
How effective is the QS exit rule for mean reversion strategies?
The QS exit rule works exceptionally well for mean reversion strategies, particularly in assets like stocks and, to a lesser extent, in bonds. It capitalizes on buying weakness and selling strength, a fundamental principle of mean reversion.
What is the significance of mean reversion in trading strategies?
Mean reversion involves buying when the price deviates from the longer trend and selling when the market is strong. The article emphasizes buying weakness and selling strength as the cornerstone of mean reversion strategies. It capitalizes on buying weakness and selling strength, a fundamental principle of mean reversion.