When To Exit
Exiting a trade. Surprisingly, this is more important than entry. This is where the money is made. Yet not one in a hundred traders actually spends any time considering exiting from a trade once they have entered. I my opinion, this is why most traders fail in the markets.
Let’s recite some of the trading principles I live by and then see how they fit into my exit rules.The big money is in the big moves. So when you are in a trade and it gives you some early profits, DO NOT look to bail out as soon as starts to correct. You want to hang in there for as long as possible and HOPE your small profits turn into large ones.
Cut losses short. I am absolutely gob smacked when I hear of traders/investors not cutting their losses short. They say to me things like: “it’s not at a loss until I sell it”. “But it’s a good company, why should I sell it”. “if it drops any more then I will sell”. The only way we can survive in the markets is to cut your losers as soon as it reached a predefined % stop loss. Do not second guess. If your initial stop is hit get out and move on. What’s the big deal. Think about it this way, if the loser you are holding onto is stopping you from entering a fantastic winning trade isn’t it sensible to drop the loser and go looking for that winner?
Less is best. Most people want to actually make more trades. They like to cut off their winning stocks/futures in the search of the next one. BUT the key to making money in the markets is to actually trade less often. This means both to be very patient before entering a trade and then when you are in it is actually much better to hold onto your winning stocks than to cut them off and initiate a new trade. The most dangerous part of any trade is when you enter. So if this is the case why would you keep wanting to place your-self in danger?
Once you have entered on a valid 1-2-3 pattern do this:Set your initial stop loss relatively tight. For stocks I do not like to lose more than 10% on futures this will have to be a predetermined $$ amount. Bear in mind, you really should not be risking more than 3% of your total equity on any one trade. So if your account is $20,000 on each trade your maximum risk is no more than: (3% of $20,000) $600.
Once you have a 25% gain then move your stop to break even. If the stock doubles back from here and takes your stop out you have lost only your brokers transaction. Sure you left 20% profits on the table. So what. That’s the “chance” we took in the HOPE of making a much bigger profit.
Once you have a gain of over 25% simply protect half of those profits until you are stopped out.Once you have a 100% gain then protect 75% of those profits until you have been stopped out.
As you can see I like to keep my exits very simple and straightforward. I do not rely on oscillators to tell me a market is overbought/oversold. They simply do not work. Once you have a profit it is all about hoping those profits turn into very big profits. You have to be prepared to give back a % of your gains in the hope of doing this.
Taking a profit too early is just as dangerous as not cutting your losses!Hope and Fear. Remember this statement:
FEAR your losses will get much bigger (so cut them off)
HOPE your profits will become much bigger (so give them plenty of slack)
Sadly, most do it completely the other way around. They fear their profits will disappear so cut them off too quickly. They hope their losses will turn into profits so hang onto them far too long. Is it any wonder they lose in the markets?