| 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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