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Exiting a Trade

Choosing Exit Price Strategies - Defining Strategies For Success

Choosing strategies for exiting a trade are dependant on the conditions of the trade and conditions of the market being traded. Lets face it, there is no simple answer to this question. Every trade and every condition are different. There are some techniques traders can use over and over again to attempt to profit from the market or reduce losses in the market. But every day a trader is in the market adds to the complexity of the decisions ahead of the trader.

First, I think it is important to qualify the condition of the trade when choosing an EXIT PRICE STRATEGY. The conditions will normally fall into one of these categories.

A. Entered Trade Recently, Trade Result Is Currently Negative (Generating Losses)
B. Entered Trade Recently, Trade Result Is Currently Positive (Generating Profits)
C. Entered Trade A While Back, Trade Result Is Currently Negative (Generating Losses)
D. Entered Trade A While Back, Trade Result Is Currently Positive (Generating Profits)

Based on these conditions of the trade, the trader should take the following action..

A. Place a protective stop to protect against unwanted excessive losses

B. Identify support/resistance levels and possibly a defined trend channel. Place a protective stop near either of these levels in the event of a market turn. Also, identify a profit target level and try to stick to it.

C. If a trader finds this situation, then something went wrong from the very start of the trade. Now is the time to try to stop the bleeding. Place a stop order just below (for LONG trades) or just above (for SHORT trades) and try to get out of this loosing position. There is no point holding something that is loosing money. We’ve all done it (hoping it will go higher), but the best advice is to get out and look for a better opportunity. You could even choose to re-enter another trade in this market when the conditions are better (and the price is lower probably).

D. The best-case scenario. This is when a trader must identify a protective stop loss level and execute the stop loss order. This is also when a trader should have identified a profit target and have explored different exit strategies. Exit strategies play a role in how our trader will attempt to maintain profits and possible attempt to let the trade run (into higher profits). The stop loss order is the insurance policy – in case our trader is wrong.

Now, on to the conditions of the market. Why are these two factors important when deciding on an exit strategy? Simple, the trade may be moving against us, but the conditions of the market may still be favorable for our trade. Or, in the reverse, the trade may be in the profits, but the conditions of the market are now weaker. Either way, we need to identify not only the condition of our trade, but also the condition of the market we are trading.

This process can be simply stated as “reviewing the decision we made when we entered the trade” and “reviewing the conditions as they apply to the current market activity”. We need to identify if the trade still shows the potential we originally identified and we need to identify any additional strength or weakness in the current price activity.

If, after careful review, we find the conditions of the market have not changed and our original decision is still valid, then we need to identify a protective stop loss and let the trade play out. This process will reaffirm the decision we originally made when we executed the trade and help us to identify the stop loss level we currently have in place. Any changes to the stop loss level should be made and remember not to attempt to increase risk. If a trader finds the original stop loss level is not correct, adjustments should be made with the intent NOT TO INCREASE RISK.

If, after careful review, we fine the conditions of the market have weakened and out trade now looks like it may move against us even further, then we need to use our insurance policy to protect our equity in the trade – thus living to trade another day. In this case, an immediate stop loss level should be put into place and we should expect to get stopped out of this trade. The only reason to use a stop loss level in this situation (rather than simply exiting the trade) is that sometimes we become greedy and hopeful the market will do what we want it to. Using a stop loss order is a way of allowing the trade to play out and protecting our equity in the process. So it works to remove some of the emotions from our trading actions and acts to protect us.

As one attempts to choose the best exit price strategy, remember that at first, the simple exit stop is most likely the logical solution. This is the best way for any trader to try to protect the trade and exit at a specific price level.

The Scaled Exit Stop system requires more thinking and should be used for trades that are showing a decent profit. Using this strategy when a trade is showing marginal profit, or some losses, is useless (in my opinion).

The Net-reverse Exit Stop strategy includes the most risk – because traders not only exit a trade, but they also re-enter a new trade in the same process. Thus, this type of trade will include additional risk created by the new position (trade). This type of trade should be practiced first (paper-traded) and as a trader builds experience with this style of trade, begin executing it.

Exit trades are designed to pull profits or protect against losses.


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