How To Exit The Trade

Cut your losses short and let your profits run.  This is the essence of your trade exit rules.

Cutting losses short

A protective stop protects your trading capital, it is your initial trade risk.  Before a trade is even entered your should know where your protective stop will be - this is your maximum loss (barring any slippage on the exit).  There are many different ways to determine a protective stop on a trade:

  • Set dollar amount - Say $500 on every trade

  • Percentage retracement - Say 10% from the entry price

  • Volatility - A percentage of the average true range of the previous x bars

  • Moving Averages - the opposite of the moving average entry

  • Channel breakouts - the opposite of the channel breakout entry

  • Based on areas of support and resistance stops

  • Time - If a position is not in profit after a certain length of time then it is exited.

Letting profits run

An effective exit technique is also required to allow a successful trade to make the most profit possible and give back the least amount of it.  

Usually a trailing stop is employed to achieve this objective.  A trailing stop moves to lock in profits as the trade moves in the traders favour, it should never be moved backwards.  There are many different ways to calculate a trailing stop:

  • Volatility - the stop is calculated as a percentage of the average true range of x periods.

  • Dollar - A set amount determined before the trade is entered.

  • channel breakout - exit a long position at the low of the last x bars.

  • moving average 

  • chart patterns - i.e. move the trailing stop behind each consolidation as it forms.    

 

Other forms of exit are:

Time Stops - A trade is exited after a certain length of time no mater what.  A day trader, for example, will always exit at the market close.

Targets - A limit order is placed to exit a position at a pre-defined profit objective.  However this tends to break the rule of letting profits run and usually reduces the profitability of a system by cutting short the best trades.

Find out more about how to exit a trade as part of a real trading system for the eminis in the Free Beginner's Guide To Online Day Trading e-book.

Find out how proper money management can massively increase your trading profits.

 
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  • Where to set a stop loss.
  • When to take profits.
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