7 Exit Strategies Professional Traders Use
Education - | 08 Aug 2019
Imagine what it would feel like being in control of your exit strategies in such a way that you exit losing positions without emotion, and you lock in profits once your predetermined targets have been hit.
This is not a fairy tale, and no, this isn’t some sort of wild dream.
Being able to control your exits and by default, your emotions, is a higher-level character trait of all successful traders.
If you are going to be in this game long term, wielding your edge against the hundreds of thousands of other traders (competitors), then you are going to have to nail your exits.
The two biggest complaints we hear time and time again among amateur traders are:
- Knowing when to take profits is hard
- Exiting a position at a loss by following your stop loss is painful, especially when previous trades you exited turned around and became profitable.
On the first point, one of the toughest profit exits you can make comes straight after a series of losing trades.
Imagine the scenario where you closed five consecutive losing trades — not big losses, but losses nonetheless.
What can add to the complexity of this scenario is if one of those trades moved into profit early on before reversing and getting stopped out at a loss. So frustrating.
Your 6th trade starts moving in your favour.
If you are human, odds are you will be keen to lock in a profit at the earliest sign of weakness given your previous five trades.
After all, a profit is a profit, right?
If you are going to realise the positive expectancy of your trading system, then you need to trade the system, which means your exits as well, as per your system rules.
You cannot jump in when you feel like it and lock in a profit.
Murphy’s law will rise out of the ether and, no sooner will you have closed your small win, only to see the price action continue strongly in your direction (without you on it).
Don’t despair. It’s human nature to want to do this.
That is why today’s blog is so important.
Even more to the point, arming your trading toolkit with a range of complex exits is key to your longevity and reaching the level of a professional.
Let’s jump into the 7 exit strategies you need to consider in your trading toolkit.
Before we get started, please note we are only covering 7 exits out of the dozen, or so we talk about in our Forex trading eBook listed at the end.
1. Rapid market trailing stop
The rapid market trailing stop is ideal in a runaway market. You could be short the Eurodollar, and some news hits the market, and it spikes down in your favour for three consecutive periods. But as soon as the move halts, reversal traders and Bollinger band traders jump in and load up in the other direction. As fast as the Eurodollar fell, it reverses, potentially wiping out your open profits.
In this case, you need an exit that tightens your exit as the market moves rapidly in your favour.
2. Support and resistance trailing stop
In the Forex market, there is a lot of talk about the big institutions controlling the price action. Many will tell you how they love to trade around key levels.
As is often the case, when a key resistance level is broken, the market can run away higher, and short sellers scramble to close their losing positions.
In this case, the support and resistance trailing stop allows you to lock in your open profits using those key levels, knowing the pain level of all the wrong-sided traders.
3. Price action
Over time, you will get a good feel for price action, price action reversals and when a market is set up to explode higher or lower.
Use your price action knowledge to lock in profits when you notice a price action pattern is emerging.
4. Large daily move
One indicator that professional traders love to use is the Average True Range (ATR). This gives you an idea of how much a market moves over a specific time period.
When one of your trades moves in your favour outside of this, you need to proactively manage the trade, so you don’t give back too much open profit.
5. Time stop
System traders often test the strength of various entry techniques using a time stop. Exit after X number of bars from entry.
When it comes to live trading, many traders implement a time stop that closes their position if there has been consolidation in a tight range over XX number of sessions.
You may also look to exit leading up to a weekend to avoid any adverse weekend gaps too.
6. Gapping stop loss strategy
When a market gaps up in your favour, an approach you might like to back-test is putting your exit at the midpoint of that sessions candle in preparation for the next session.
So, if it were a daily chart on the Dollar-Yen and the market broke higher and closed near the highs, put your exit at the midpoint of the breakout candle.
7. Break-even stop loss
As the name implies, you move your exit up to break-even (your original entry price) once the position has moved in your favour.
Some look at their initial risk (1R) and move their stop to break-even once the position is 1R in profit.
So, if your initial risk is $500 (1R) and your position is now $500 (1R) in profit, you would move your stop to break-even.
As you can see, we’ve only covered 7 exits out of the many available, but hopefully, these will give you excellent food for thought on how to apply some to your trading strategies.
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
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