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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 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 - 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.
 MORE RESOURCES updated Thu. June / 08 / 2023
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