Profitable Trading - Part 4 of 5
May 25th, 2008 by Erv
How you exit a trade is as important, if not more important, than how you enter it. This may seem odd, but if you think about it, if controlling your risk to small, predetermined amounts is the key to successful trading and investing then that, by definition, tells you how important the exit is.
Your trading strategy might well turn an initial stream of profits into a flood of wealth for generations to come, so exiting with a small loss — the 2% rule —is critical. But knowing how and when to exit with profits is equally as critical. After all, what good is it if you give back a majority of your profits before getting out?
Or, what good is it if you get out of a winning trade prematurely, when a big trend is about to emerge, and you caught it early on?
So how do you exit a trade with locked-in profits? By always using a trailing stop to reduce both the risk and the odds — as well as the amount — of profits that you can potentially give back. It is critical that when your trailing stop is hit to immediately get out of the trade.
Discipline makes money: discipline in predetermining your risk and putting as much emphasis on when to exit a trade as you do on when to enter a trade. There are myriad types of exit strategies designed to maximize profits, and I’ll go into them in future post. Suffice it to say for the purpose of today’s post that:
- Knowing how and when to exit a market is as important, and often more important, than knowing when to enter. Always remember that.
- For a good, general, exit strategy always use a protective sell stop that starts at a 2% loss level and always move the stop in favor of your position to reduce risk of loss, or risk of a setback in profits.
As a corollary, never move the stop in a way that increases your risk of loss or gives back a greater portion of your open profits!
And to maximize your success, please stay tuned for the final installment of this series, to be published at some random time in the future.
