Published on March 22, 2014
Over the years you hear many trading ism's that many times are hard to follow. Think of "riding the trend until it bends" and you will know what I mean.
How many of you have been on the winning side of huge moves only to exit and book the "gift" the market gave you? …but the move continues without you
I know sometimes I have spent my paper winning before I have booked them. That was more of an issue starting out in trading until I quickly realized to much dreaming can be costly.
Now, it is simply dumping the money right back into the trading account. Yes, things get easier as time goes on.
Let's look at another "isim" that I am particularly fond of: "Know where you will get out before you get in." Setups (and triggers) are talked about quite a bit in forums and in personal conversations with traders.
Rarely do I hear people talk about exits. Everyone has their own take but I believe it is the exits that are the most important part of a trade.
How you manage exits will be the deciding factor on your potential for trading success.
Without a defined exit, your loss will quickly become painful to your account and on the flip side, how do you know when to stop giving back profits?
Ever been in a trade that was in profit and then seen it turn negative? I have.
Ever sat there hoping the price would return in your favor? I have.
Ever taken a much greater loss than you initially planned on? I have.
Ever jumped out of a trade because of the "profit itch" only to see bigger moves? I have.
Exits must be defined in your trade plan. The only way to define your risk is to have a point where you will exit the trade. Think of yourself as a risk manager.
Let's take a simple Forex example. $5000 trading account x 2% risk = $100 dollar risk on any trade
If you know you can risk $100, you must know what the maximum adverse price move can be before you hit that amount.
Knowing your exit will allow you to understand how many contracts and size of contract (micro, mini, standard) you can buy to limit your risk to your defined risk tolerance.
If you are the type of person who needs absolute control over every detail (Control Freak), skip trading as a career choice.
You must be able to accept the following if you have any hope of achieving any level of trading success:
You can control your entry. You can control your exit. You can control your risk via your exit. Everything else is out of your hands.
Once you have placed a trade, the market will do whatever it will do. That, is a certainty. All you can do is define your exit strategy to either reap the rewards or limit your risk.
It does not have to be complicated. Trail a moving average. Take profit at a zone of support/resistance. Exit when price patterns indicate a reversal (higher highs and lows reverse). Exit partial at 1x your risk amount. Exit when a momentum oscillator is showing a turn in interest.
Far too many accounts have been wiped out because the owner did not take exits seriously. They gambled and they lost.
Save that for Vegas but in trading, be a professional, act like a professional and perhaps you will only need trading to support your lifestyle in the near future.
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