Exits: Let the market take you out, not your emotions By Nial Fuller
Every trader that has any live trading experience under their belt knows how difficult it can be to figure out when to exit a trade. In fact, most professional or experienced traders will tell you that exiting a trade is the single most difficult part of trading. Unfortunately, most forex traders end up doing the exact opposite of what they should do when it comes to exiting a trade; they exit manually on emotion rather than simply letting the market hit their stop loss or profit target. The problem with profits.is that they are really hard to take. This might sound strange to someone brand new to the world of trading, but to the seasoned trader it is all too familiar. Once you are in a trade that is up some decent pips, you see no reason to close it out, after all why would you if you see no reason not too? You decide to let this trade run because it is looking so strong in your favor right now, and you really need a big winner. While letting profits run is the name of the game of forex success, most traders simply do not do it correctly. If you are going to let that profitable trade run than you must either trail up your stop loss to lock in some profits or you must take profit at a pre-defined profit target as part of your pre-defined trading plan. The reason why so many traders are terrible at taking profits is because they have no pre-defined exit strategy. Entries are easier because they are more definable and thus less subjective than exits. The only way to take emotional impulses out of the equation of exiting trades is to KNOW WHAT YOUR EXIT STRATEGY IS IN ADVANCE. When you know what your exit strategy is before you enter a trade, there is no possible way you can make an emotional trading mistake, unless you consciously override your pre-defined exit strategy, in which case you will know why you messed up and thus be more inclined to follow through with your pre-defined exit strategy on future trades.
Example: The USDCAD daily chart fired off a large pin bar reversal back towards the end of May. If you sold a break of the pin bar low you would have gotten filled and then immediately saw price retrace up to about the 50% level of the pin bar. Many traders would have freaked out here and taken a loss just before price reversed and fell like a rock in their favor. You must really learn to set and forget your trades once you enter them so that you do not attempt to control the market like this. (see image below)
Eliminate greed by writing into your forex trading plan a clause that says after any trade closes out you will walk away from your computer for however it long it takes you to cool down and get your mind off the markets. Whether its 24 hours or a week, if the only way you can eliminate wanting to jump right back in the market after a big winner or a big loser is by physically removing yourself from your trading desk, than do it. Pre-defining these types of actions is how successful forex trading businesses are run. Some people have inherently higher levels of self-discipline than others when it comes to trading, however, even for those people with a plethora of self-discipline; it is not going to hurt to make sure you have everything pre-defined in regards to your trading. The point of walking away from your computer after a big winner is to eliminate greed. How many times have you had an awesome trade and then saw it continue on in your favor without you aboard? This happens all the time and it is just an inherent aspect of the way the markets work. You cannot possibly ever make every single pip on every single move in the forex market, the sooner you accept this fact and move on the sooner your trading will take a dramatic turn for the better. The problem with losses is that they make you emotional just as winning trades can, but in a different but equally dangerous manner. Losing trades should be viewed as a business expense; the cost of doing business in the forex market is losing trades. Just like any business you need to make sure your revenue is greater than your cost if you want to make consistent money. MANY forex traders make the error of over-trading or risking too much; this makes their cost much higher than any revenue they make from winning trades, therefore eventually forcing them out of the forex trading business. Eliminate fear by setting a pre-defined stop loss and not moving it. Period. Dont move your stop loss further away from your entry price because you think you see a very solid looking price action signal forming that you think will spring price back up to where you can get out at break even. A general rule is that if price has moved far enough against you to hit your stop loss than it very likely means the market is switching momentum, at least for a short period of time, and since you dont know how long this momentum will last there is simply no reason to assume the market will come back in your favor. Accept that losses are a part of forex trading and you will be on the road to consistent trading results much sooner than what otherwise would be possible. Just as you should pre-define what you will do after a winning trade, so you should pre-define what you will do after a loser. Maybe you need to physically detach yourself from your computer in order to keep yourself from jumping back in the market to get your revenge. Maybe you just need to switch over to demo trading for a while to get yourself back on track and cool down a bit. Whatever you decide works best for you after a losing trade or a series of losing trades, make sure you write it into your trading plan so that you have a concrete and tangible plan for what to do when you have a losing trade, because you WILL have them. Professional traders understand that trading is simply a game of probabilities. We set the probability in our favor by taking price action setups that look very obvious and that provide a great risk to reward pay off. Over time, if you have enough discipline to only take obvious high-quality price action setups and let the market take you out of your trades instead of your emotion, you will become a consistently profitable trader. Example: Gold recently fired off a great daily fakey setup with the bullish momentum. After the fakey / pin bar formed price retraced ALMOST the entire length of the fakey bar. Many traders would have freaked out and exited the trade early just as price was nearing the low of the fakey bar. Many times price will retrace like this and then take off in your desired direction. You must really learn to set and forget, otherwise you will end up kicking yourself once price takes off in your favor and this will induce more emotional trading mistakes. (see image below)
I will end this members only article with this concept; allowing the market to take you out of a trade at your pre-defined profit target or stop loss placement is the correct way to use your intellect and logic to exit a trade. The reason for this is that when you define your exit strategy prior to entering a trade you are operating as objectively as you can, assuming you are not planning on over-leveraging yourself. Anytime you think you are using your logic and intellect to exit a trade by manually exiting based on something you see while your trade is live, you are exiting on emotion. And while you may indeed save yourself some lost pips or perhaps squeeze a few more out by manually over-riding your pre-defined exit strategy, when you trade in this way you are not trading in harmony with the market, but instead you are trying to control the market. The only way to trade in harmony with the forex market is to eliminate all emotional behavior by pre-defining all of your trading activities before you enter a trade. Talk Soon Nial Fuller www.LearnToTradeTheMarket.com Copyright 2010 - do not share , print or reproduce this article.