"Don't worry about what the markets are going to do, worry about what you are going to do in response to the market" - Michael Carr, Market Wizard
Exits are something that a lot of traders struggle with.
For example, have you ever had the price go within a few pips of your target, only for it to fall away and you get stopped out?
Or perhaps you have had a news event turn a winning trade into a loser?
Or you simply give back more profit than you think you should.
The good news is that by improving your exits you can minimize the impact of these issues on you trading account.
Regarding exits here are a few points to consider:
- Objectives. You need to be very clear in what you are trying to achieve. What size moves are you looking to capture, and how much profit are you willing to give back to achieve your target? This can actually take a lot of soul searching to get right.
- Market Types. The markets have several different types, such as bull normal, bull strong, bull volatile, sideways volatile, side quiet, bear normal etc. You want to determine the market type, and apply the right exit to the right market type.
- Don't try to be "right". If you are making your exits an all or nothing decision, you are trying to be "right" that the market will reach a certain point, or do a certain thing. Instead, it's good to scale out small parts of your position at a time.
- Risk management. You should have risk management rules, in order to keep your profits and avoid losses (this is much more than a stop-loss).
- Key Levels. Sometimes you can see exactly where the market will likely turn. It can be good to plan ahead what to do when the price reaches these levels.
Overall, this may seem a little complex - that's because it should be. When it comes to trading, you should have complexity in at least two areas: exits and position-sizing.
As the market will often (if not always) change while your position is running, you need a series of rules that allow you to trade what's going on in front of you. Otherwise you can't respond effectively, and you're potentially going to miss out on profits/ having a losing trading system.
Remember: it all starts with your goal, so begin by getting very clear on your objectives and then look to devise an exit strategy that achieves them.
About the Author
Sam Eder is a macro currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access).
