Exiting a trade is as important as entering it

 

Does it happen to you that you are in an open trade and the price is oscillating near your entry point and you think that the price is changing the direction? And as far as you close the trade the price continues to go in your direction?

Exiting the trade prematurely

This means that you have an opinion about were the price is going, you think it’s going in the opposite direction, don’t you? This is the same as having an opinion on the entry point. Successful traders, especially trading teachers say that trading based on your opinion will lead you to losing money. And when a trader loses money trading based on his opinion he starts trading someone’s trading method or system. Maybe you have managed to train yourself not to open a trade impulsively, but you didn’t realize that exiting a trade is as important as entering it. So if you want to become a consistent winning trader, you have to follow all your rules, not just a part of them.

My personal experience

When I first started trading, I was opening and closing the trades without any trading plan. I didn’t have a trading strategy. Later I’ve learned about the entry strategies, because all the authors of the books were talking only about the entry, very few were talking about exiting a trade. After a while I’ve learned that I should put the stop, but I was actually placing it where I was feeling comfortable with it. It took me a while to learn where to place the stop, but I’m still having troubles exiting my trades at the profit targets, because I close them before they reach it.

Saying “With the next trade I’ll follow my rules”

When you see that your trade hasn’t achieved the profit target yet, but only a half of it you may say “I’ll take this profit and the next time I will wait for the profit target to be reached”

On the next trade you may even have the self-control to wait until it reaches the profit target but it arrives near the profit target and then turns back and stops you out. You will be blaming and asking yourself why you didn’t close it when it looked like that the price was changing direction. Doing this may cause disastrous consequences. You’ll not get the expected results, or you can even lose the money in your trading account. But even worse, you’ll enforce your bias that you should exit the trade when you think the price is changing direction, but remember that you can’t predict the market. This behavior might be very difficult to correct.

Treating entry strategy as something magical

Traders think that there is something magical about the entry strategy, but closing a trade is as important as the entering the trade.

  • Let’s assume you’re in a trade, your profit target is 10 ticks and the price is just 4 pips from your target, you decide to close it because you believe that the price is changing direction.
  • Let’s assume that you have a signal to enter the market and the price is just four ticks away from the entry.

Will you enter the market 4 ticks below your entry, anticipating that the price will go in the direction you think? Most of the traders will not, unless they are completely new to trading. So we should treat our exit points as the entry points. We should follow our trading plan.

What we tend to do when we buy a trading system? We tend to take in consideration only the entry strategy but not the exit strategy. We think about the entry strategy as of something magical, as about something that no one had already seen before. We think that we can take an arbitrary stop loss and an arbitrary target for taking profits and we will succeed. Sometimes the trading systems have a stop loss that we can’t afford we just use the stop that feats us, and maybe we try to use the large profit target that was set by the trading system. If you do so, at least test it, because otherwise you’ll pay for the testing with the money from your trading account.

Solutions

There are more solutions to this problem. You can reward yourself if you manage to follow your rules for a certain number of trades. Or you can punish yourself if you don’t succeed to follow your rules. You have to be sincere with yourself.

When I told the master trader I’ve taken the private tutoring with, that I have this kind of problem he said that I should punish myself by not trading for one week if I don’t manage to follow my rules. Although it may be good in some situations I preferred other kind of punishment. I agreed with my workmate that I would offer him the coffee for a week if I’ll break my rules. After offering him the coffee for the entire week, the next week I started to follow my rules.

from Easy Trading Academy