Last updated on March 6th, 2017
In a recent trading article, I wrote about trading exits and how many people can easily enter a trade but have no idea when to exit their trade.
There is so many things wrong with entering a trade without a plan one of which is you will have little to no plan for money management.
Without managing risk and your trading account, your presence in the market will be short lived.
Two Trading Exits
You have two exits when you are in a trade:
Protective stop exit.
With a protective stop, you are able to say “I will only risk 2 points” on the trade and barring slippage, that will be your maximum loss on this trade. While you can aim for 2 points or any other target for a profit exit, the market is what will dictate your profit. You’ve heard the saying “take what the market gives you” and the market will give and your job is to know when to take.
The best you can do with exits for trading profits are:
- trail to take advantage of extended moves,
- profit targets to assist you with a favorable risk/reward scenario
- scale out partial, and/or monitor when the move is losing steam.
The question is what is right for you?
Some people have an easier time in a trade once they take off a portion and get paid for the trade. Others will use market cycles/rhythm/structure to pinpoint places the market may either stall or turn against the position. There are those who can read price very well and will exit if price is showing it’s starting to run on empty in the direction of the trade. Look, there are many ways to take your profits and although you will hear the plus and minus for all of them, at the end of the day it all depends on what serves you.
Using Trend Lines For Profits
I want to take a look at a few ways to take profits on trades that I and many I know have used over the course of their trading careers. The first one is using a simple trend line. I say simple however like many things in trading, you want to quantify a way to draw and update trend lines so you can be consistent over the course of many trades.
This is an actual entry that took place a few months ago in the Forex market. It’s beyond the scope of this article however it is simply a confluence of several factors (the setup) and gearing down to a lower time frame for timing the entry (trigger).
We are going to use a trend line break to let us know that the move higher may be over. We are not looking for a slice through the line however we are looking for a solid break of the line. We will adjust the line when price puts in a lower obvious swing and breaks the previous high.
So I can add a trend line as shown here on the chart which if price rockets down from the peak of 226 pips, I will end up with perhaps 40 pips on the trade. This is one reason many people scale out partial profits. It can be extremely difficult watching price retrace and eat up all the unclaimed profits the trade gave you.
Things have now changed in regards to the trend line. As you can now see, price had a healthy pullback to the area price broke out of. It then made a new high which now allows a more aggressive trend line. Now, if price decides to push through the trend line, you can bank over 100 pips.
Now we are seeing price make highs but then pull right back into the yellow range box. While there is one area that price made a new high, it was done inside the range and it is not “obvious”. I’d negate it and although it will signal the break earlier, we would still wait to see if it was a true break and not just a run.
Here we have used a different low and I also have added an aggressive line in red. You may want to use these aggressive lines after a parabolic push in price. You can see how price smashed through the regular trend line. The red line while it did break, price did not make an aggressive move down. That’s fine because as you can see, after price broke the red line, it made little attempt to test the backside of the line. You’d probably place your stop at the bottom of those small candles that occurred before the big push through.
This is a nice and simple rules based exit strategy that takes advantage of the trend until you can objectively see that it has broken. Will you leave profits on the table? Sure you will and that is just something you are going to have to learn is all part of the game.
Go through some past trades and see if you can identify where you would have exited if using a trend line based target method.
In a future article, I am going to point out a little “trick” that allows you to use the break to position yourself in a move in the direction that took out the trend line. I think you may find it interesting.