Trade Exit - How To Cut Losses And Let Profits Run
Cut your losses short and let your profits run.
This is the essence of your trade exit rules.
Cutting losses shortA 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 tradePercentage retracement - Say 10% from the entry priceVolatility - A percentage of the average true range of the previous x barsMoving Averages - the opposite of the moving average entryChannel breakouts - the opposite of the channel breakout entryBased on areas of support and resistance stopsTime - If a position is not in profit after a certain length of time then it is exited.
Letting profits runAn 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 averagechart patterns - ie 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.
Tim Wreford runs Online Futures Trading, a website that provides information and resources for traders.
Tim also provides a free day trading system, the results of which are updated daily on the site.
Tim Wreford
