Last updated on July 17th, 2019
Exits. When you are out in any public place, it is easy to spot the way to get out.
There is an EXIT sign above each doorway or other means to leave the area. Here in my neck of the woods, it the law to ensure that the EXIT sign is lit up. In case of an emergency, you will always know the best way to leave the area you are in.
Too bad trading is not the same way.
Some have said that the entry is secondary to a proper exit. There is some merit in that of course. You can get into the market whenever you like but it is the exit that will determine your profit or loss.
Flip a coin to determine a direction and then enter the market. Either let the market go against you a certain % of account or go in your favor for a 1:1 risk/reward ratio. Exiting, is what will determine your success trading that way. Of course, that is not a method I would ever suggest as a way to profit in the markets. This is purely for example sake.
People want the perfect exit. The exit that will bank them the majority of the move. The exit that will get them out of a lousy trade with the least amount of damage. We have all heard “Let your profits run and cut your losses short”.
The fact is that most traders do the opposite. Through hope, fear or some other reason, they will let the losers run instead of accepting the loss. They will cut profits off at the knees before they can get the meat of the move. It is a no brainer to do the opposite of that but there is an entire industry in the trading world to help you stop doing that.
Still, the question remains….when to exit.
I know some traders that have been trading since I can remember.
They have amassed some solid returns and, surprise, they still find exiting to be the hardest thing to do. They believe, as do I, that your first job is risk management. That is one thing you can certainly control in the world of trading. The second thing is to manage their trades according to how the market is acting at a point in time.
They may have a target but the market does not exist for you to accomplish targets. Being stubborn and holding onto a target when price is telling you it is time to leave is the sign of a rookie.
There is a reason why scaling out is popular. Whether or not it is the best way to trade on purely a financial basis is not the scope of this article. For many, it is the best way to trade on a purely psychological and risk management basis. It feeds that “bank profits” call we hear in our minds but also feeds the “make more money” call as well.
I would love to type that taking 2.34R is the secret to profitable exiting. The fact is that nobody exits at the prime time. Nobody routinely exits at the top or bottom of the move and milking the entire offering of the move. It does not happen regardless of what you read in marketing emails for the latest and greatest system.
All we can do is the best that we can do. Follow some of the general suggestions that you have no doubt heard before:
- Take your loss at your predetermined stop or better.
- When the market goes parabolic, take the gift.
- Exit at your planned profit target.
See, there is no secret being held back from you in trading. There is no grail, no “ex-banker with the secret formula for 99% trading profits“. There is no perfect trader and even those with massive success will tell you that they make mistakes all the time.
The difference is they go right back to their method of trading. They accept imperfections and under stand that they will leave money on the table. Your exits will never be perfect so don’t beat yourself up with an exit that watches a 50 point rally after you bank the profit.