Exits are something that a lot of people struggle with. The good thing is that improving your exits is one of the best ways to improve your trading system.
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. (I actually use 14 different market types). You want to determine the current market type, and apply the right exit to the right market type.
- Don’t try to be “right”, or make your exits an all or nothing decision. It’s good to scale out small parts of your position at a time (I suggest 3 times minimum). Putting too much emphasis on one exit can become cause you to second-guess yourself. Splitting your exit up into three or more parts releases some of the psychological burden, and allows you to think more clearly about your position.
- Risk management. You should also have risk management rules, in order to keep your profits and avoid losses (this is much more than a stop-loss).
- Chart analysis & Support/Resistance levels. Sometimes you can see exactly where the market will likely turn. Your rules around chart analysis should be very clearly defined in your written plan,with little discretion left.
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 (as Ray Dalio says), 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 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). He is a co-owner of Forex Signal Provider FX Renew (Get a FREE 30-day trial). If you like Sam’s writing you can subscribe to his newsletter.