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same as their stop placement strategy! I guess this is not too surprising, given the emphasis that technical books place on entry strategies. There is a huge difference between an exit strategy and a stop placement strategy. |
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An effective exit strategy will allow you to keep more profits than just allowing your trade to be stopped out with a trailing stop. Unfortunately, the vast majority of traders allow their profitable trades to be stopped out. What is the difference? An effective exit strategy requires active monitoring, and more work than it took to enter. In most cases a stop placement strategy is fairly automated. The reason the exit strategy takes more work is that when you are in a trade your disempowering beliefs are attempting to create emotions that distort your ability to perceive the market. It takes a conscious effort to overcome this. |
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Effective exit strategies incorporate valid reentry strategies. |
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Depending upon your trading methodology, you may want to exit the trade whenever the continuity of thought has been broken or has weakened. If you exit a trade because you think the continuity of thought has weakened, do you have a strategy to reenter the trade, or do you wait for another signal like the one that got you into the trade in the first place? The biggest hindrance to investing the time needed to devise an exit strategy is your ego. Many traders watch a market shoot up to the sun, and then watch it retrace all the way back down. Most traders fail to exit at the first sign of weakness, because they do not have a valid reentry technique. Most traders would rather allow their stop to take them out of the trade, because their belief structure has created some very powerful arguments for doing so. Your beliefs will create a whole lot of reasons not to exit the winning trade, even after you are fairly sure that the continuity of thought has been broken. The correct way to reenter a trade after the continuity of thought resumes is to have a different entry strategy that gets you back in immediately. |
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The important thing is to use a quantifiable methodology to determine if the market is weakening. You have to be able to identify exactly what caused you to think that the market was weakening. You must be able to do this because if you find yourself repeatedly exiting a winning trade, and then reentering at a more adverse price, you can take active steps to change how you identify a weakening of market consensus. The market will always tell you when your methodology needs to be refinedby the red ink that you see. This demands that you use pinpoint precision in determining the |
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