When I review trade setups, I always state the rules for entering the trade. However, most of the time, I leave out the exit strategies.
It is not because exit strategies are not necessary. Instead, they are so crucial and deserve so much attention that I’m unable to include them in a concise review.
In this article, let’s take a look at five ways to exit your trades.
Passive Exit Strategies
If you prefer to “set and forget”, you need to pay attention here.
1. Initial stop-loss hit and exit
I’m assuming that you always have an initial stop-loss order. If you don’t, then do.
In this case, the market hits your initial stop-loss, and you suffer a loss.
Although it is the worst possible outcome for your trade, be glad, as you have followed your trading rules with the discipline required for trading success.
2. Target price hit and exit
Again, I’m assuming that you have a target price with a limit order set to bank your profits. If you want to let your profits run, it’s okay to omit a target limit order.
However, most traders don’t feel that great having their targets hit. Why?
The fact that their targets were hit meant that they could have set it higher. (Except in situations when the price hits your target to the exact tick. Not likely.) This is ex-post regret.
3. Time stop hit and exit
Time is money. Thus, some traders have a time stop.
Having your capital tied up in a sluggish position while missing many other great opportunities is hardly ideal. If your trade is not going anywhere within a period, you should exit and look for other opportunities.
How long do we wait before exiting?
Observe your trades to find out. Keep reliable trading records. Most of the best trades move quickly towards your favour.
Active Exit Strategies
If you can keep your cool while in an active position, then you may attempt to manage each trade actively.
4. Trailing stop hit and exit
If you prefer to lock-in profits when possible, trailing stops are your best tool. Trailing stops are stop orders moved in your favour to lock-in profits.
There are 1001 methods to trail your stops, but the principle is the same. You need to balance between locking in profits versus suffocating the trade to a premature death.
5. Conditions have changed, exit at market
We enter each trade with a reason. (At least, I hope you do.) If that reason is no longer valid, we should just exit at the market price.
For instance, you entered a trade based on the Holy Grail which finds opportunities in strong trends. Then, you saw that prices were moving sideways for a prolonged period. The strong trend you wanted to capitalise on was missing. Thus, we should exit.
This method is the most logical way to exit a trade, but also the most subjective. A trader must understand his edge extremely well to use this exit strategy.
Most new traders are too excited when they are in a trade, with eyes glued to the P/L movements, to reassess their edge continually. Hence, they are better off staying with passive exit strategies
Regardless which method appeals to you, you must have an exit strategy in mind before entering any trade. Every trading template should have a section on an exit strategy.
Giving back too much profits to the market? Learn how to with a complete framework that includes market bias, entries, and exit strategies.