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How to EXIT a trade the RIGHT way

by | Oct 17, 2022

When to EXIT a trade the right way

 

A trading system’s entry is just as important as a trading exit.

You might think, it’s just where you place your take profit – but it’s not.

You see, during market volatility and irrationality of trends, there are other ways to exit a trading position the strategic and right way.

In this short and illustrated piece, I’ll go through the four main ways.

Exit strategy #1: Stop loss or take profit

The most basic way to exit out of a position, is just letting your system take over.

You get in (entry price), you set your stoploss and take profit.

And you let the market price move to one or the other.

Once it touches the stop loss, you’ll exit at a pre-defined level to curb your losses and to stop you from furthering the loss.

If it touches the take profit level, then you’ll also exit your trade at a pred-define reward level. And instead of taking a loss, you end up with a gain.

Easy enough…

Exit strategy #2: Trailing stop loss

The trailing stop loss is a powerful technique where you move your stop loss in the direction of the trend the market is favouring your position.

Let’s say you go long (buy) a market at R150. Your stop loss is at R130 and your take profit is at R200.00.

And the market over time heads to a level of around R180.00.

You want to lock in a good portion of the profits, in case the market turns around and goes against you.

And so, you’ll raise your stop loss to around R170.00 (risk to reward is 1:1).
Now if the market turns against you and hits your second stop loss, you will exit with a profit instead of a loss…

Here’s an example below of where we used the trailing stop loss to bank a minimum profit with a short (sell) trade with Firstrand.

Exit strategy #3: Time stop loss

This exit strategy is not very common amongst traders. But I think it’s super important to include in your strategy.

You see, as traders we are interested in short term gains. We are not investors who want to hold for a long period of time.

That’s because when a trade lines up, and a long period of time elapses there are a few problems that can occur including:

  1. Ongoing interest daily charges

  2. System setup becomes null and void

  3. Investing becomes more of a marriage rather than a date (emotions get involved).

  4. We have opportunity costs to take BETTER trading positions.

And so my rule generally, is to NOT hold a trade longer than 5 – 7 weeks.
After 7 weeks I take a less than expected loss. Or I bank a less than expected gain – depending on where the market is trading at.

When I exit doesn’t matter. It can be the first hour of the morning, anytime in the afternoon or before the market closes.

As long as I get out of the trade, after 5 – 7 weeks – I’ll have more income to look for better opportunities.

Take a look at the yellow circle below, where I exited out of this Vodacom trade. 

Exit strategy #4: Events

This is rare but necessarily.

There are different market events that you may consider exiting out of a position – regardless where the price is and what day it is.

These include the following:

  1. Black Swans (Freak anomaly events that can cause major spikes). 

  2. Non Farm Payrolls (More for Forex and Commodities trading) 

  3. Possible warnings from companies regarding (cooking the books, liquidations, suspensions, Board of executives removal and so on…). 

  4. Huge gaps (when the market jumps way past your stop loss or acts in an irrational way – GET OUT!).

So trading is in a way a bit subjective at times. As much as we want it to be 100% mechanical and technical. We do need to apply these types of events when it comes to exiting our positions.

In some cases, you lock in minimum gains and profits. In other cases, you take small losses. And in worst cases we avoid MASSIVE losses that are unpredictable in the future.

I trust this will open your mind to new opportunities and musts for when you exit out of a position…

Did you find this article helpful? Let me know by sending a quick email to timon@timonandmati.com  

Trade well, live free.

Timon Rossolimos

Founder, MATI Trader

 

 

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