To be honest, its probably my weakest area. I'm getting better and better at picking my entry (long or short), but the exit I still struggle with. It must be a bias/greed thing because in reality, it shouldn't be any more difficult.
In my experience its a weight of evidence thing. Take the chart below - and for the record I actually did get out at the top this time! But thats not the norm...it just seemed fairly clear this time, ie lots of signals.
Firstly a clear double top, and with both peaks a move to new highs before a reversal before the end of the day resulting in a lower closing price than the previous day AND a lower close than that days open. As a general rule - bearish. Especially when it occurs to form the second peak.
Secondly a clear loss of momentum on the RSI (noted by the angled red bar), forming a quite noticeable bearish divergence. This can happen and price can still power on to new highs, but like I said, its a weight of evidence thing.
Thirdly, two clear volume peaks co-inciding with the two price peaks which were reversal days.
Finally, and this is something that I've picked up from Bill Cara. For the record he uses a 7 period RSI instead of the standard 14 period. On the first peak, both the daily and weekly RSI 7 were above 90 (weekly chart not shown). If you know what RSI is, you'll know its an overbought/oversold indicator. Bill talks about the risk of being 'in' the market when daily & weekly RSI 7 values are that high, and the risk of being 'out' of the market when they are the reverse..ie down around 10-20. When they are that high, the chances are that the market will fall and if you're 'in' the market, you risk losing money. When they're 10-20, the chances are the market will rise and the risk is being 'out' of the market as you miss a move up.
What I'm getting at is that I was aware they were both that high and therefore on the lookout for signs of a reversal...which I managed to see as detailed above.
BUT...that was just this time! Its different every time. But when the daily and weekly and even monthly RSI 7 values are all >70-80 its a good warning sign to be on the lookout for a reversal. There's obviously no hard and fast rule...it takes observation, weight of evidence and complete objectivity (and thats by far the hardest bit!)
