An exit rule is a prewritten condition that defines when and how a position should be reduced or closed, independently of how the eventual price path makes the trader feel.
How it works
Exit rules can be tied to thesis invalidation, profit targets, trailing conditions, elapsed time, or a defined combination. The mechanism and priority between rules should be specified before the result is known.
The same rule must be applied consistently in testing and execution; otherwise historical results and live decisions are measuring different systems.
Why it matters
Precommitted exits prevent every change in unrealized P&L from becoming a fresh negotiation about what to do next.
No exit rule can identify the exact market top or guarantee favorable execution. Different exit mechanisms trade off participation, risk, and time in the market.
A simple market example
A trade enters at 100, invalidates at 94, targets 108, and may trail only after a defined new high. A move to 106 and back to 101 does not create a new exit rule after the fact.
Common mistakes
Moving a target or stop mainly because the current path is emotionally uncomfortable.
Choosing the historically best exit after seeing each path instead of testing one prewritten rule.
Frequently asked questions
Is a stop loss an exit rule?
It can be one type of exit rule, but systems may also use targets, trailing rules, time exits, or combinations.
Can an exit rule change during a trade?
Only if the conditions for changing it were defined in advance or a deliberate rule revision is made outside the live decision.
Why test exits separately?
Exit logic changes payoff distribution, holding time, drawdown, and interaction with entry rules.
Educational content only. Definitions describe common market usage and may vary by jurisdiction, instrument, or institution.