rss

The 7 Best Ways to Exit a Trade

In trading the money is not made in the entry, it is in the exit. The art of the exit is crucial to a traders success in the markets.  Profits can disappear if you do not take them at the right time, small losses can become huge losses if you do not cut them. Small profits can become huge profits if you let them run until they truly stop.  Keeping capital tied up in a trade going nowhere and just letting it sit there can cause you to miss out on other great opportunities.

So what is a trader to do?

  1. Use stop losses, only risk 1% of your total trading capital on any one trade, when you have lost that 1%, get out. Position sizing, stop losses,  and understanding volatility is key.
  2. Enter trades right at break out points to new highs or off key price support levels or key moving average support levels. If it loses that support later and fails to retake it quickly then sell it.
  3. Buy when a stock is one ‘R’ multiple above a key support level, sell if it falls back and loses that support level. (One ‘R’ multiple = 1% of total trading capital).
  4. Use a ‘stale’ or ‘time’ stop: Set a time limit on how long you will give a  trade  to move  a certain amount, if it fails to move enough fast enough, get out.
  5. Volatility stop. The market or your stock has a big expansion in its daily price range or starts moving against you the full daily range. You either cut your position down in size or get out due to increased risk.
  6. You trail a stop loss behind your winner, when it reverses and hits that stop you sell. A trailing stop can be a moving average or a percentage you your gain.
  7. You sell your position because you have found a much better trade with a better probability of success or a bigger upside.

The key above all else is always to have a plan to get out of every trade before you get in. Before each trading day begins think about what you will do based on the price levels your open trade is at.

Re-Evaluate

Re-EvaluateBe willing to stop trading and re-evaluate the markets and your methodology when you encounter a string of losses. The markets will always be there. Gann said it best in his book, How to Make Profits in Commodities, published over 50 years ago: “When you make one to three trades that show losses, whether they be large or small, something is wrong with you and not the market. Your trend may have changed. My rule is to get out and wait. Study the reason for your losses. Remember, you will never lose any money by being out of the market.”

Aim Small, Miss Small

As many of you already know, one of the biggest factors in successful trading is how well you manage the trade – that is the stop-losses you place, the amount of capital that you put to work, where you take profits, and how you protect the profits that you already have. You could, no doubt, write many books on each of these subjects, but for now, I’m going to focus on a small, but critical aspect of risk-management and my inspiration comes from the movie “The Patriot”, which happens to be one of my favorite movies of all time.

In the clip below, Benjamin Martin (the father) asks his two young boys, “What Did I tell ya ‘fellas about shooting?” and they replied, “Aim Small, Miss Small”. Every time I hear those words I tell myself how true they ring across so many spectrums of life. As an avid hunter, if you just aim the gun at the direction of the game you are targeting, you are bound to miss. However, if you pick out a tiny, specific area of the animal, whether its the upper-right side of the chest, or some other smaller area, you have a much better chance of hitting your target. In fact, the smaller the target area, the lesser amount of margin for error you have in missing.

So how does this apply to trading, you must be asking? The stop-loss that we set in relation to our entry price is a reflection of our “Trading-Aim”

When I trade, I look for setups that are as close as possible to a desirable stop-loss. By desirable, that means I’m not just picking a spot that is 1 or 2% from my entry price for the sake of it being so, instead, if I am long, I am going to look to place a stop-loss somewhere underneath a critical support level, and if I am short, then I am going to place a stop just above an area of resistance. So the place that I choose for my stop-loss is that of a strategic area and a point to where I know, that if it hits the stop, I know that my thesis is no longer valid and therefore, I must exit the trade. (more…)

The Artist and the Trader

Art is for the Artist. Words must be written, Songs must be sung. Visions must be seen. Not because they are valued; but because they are Ideas. The Artist understands that wealth, true wealth as opposed to simply being rich, stems from Ideas. Great Art is valued, if valued properly, because they express an Idea well. Not always because they express a grand idea.

There is the modern myth that the Artist must not be materialist or wealthy. Whereas the Trader, as an Artist, knows that all Artists are wealthy, but all are not rich. It would seem that a great Trader and the Artist share a similar soul.

For they both :

Take a loss. The modern myth largely stems from the Artist producing their best Ideas to bounce back from a loss. They both believe they can replace their losses with better Ideas.

Respect everyone. An Idea can come from anyone. Every trader has been on the wrong side of a trade against someone of much more limited means, brains and circumstances.

Generous souls. For if wealth comes from Ideas, Ideas can always flow. An Artist never will admit he is out of Ideas. Many only have one grand idea, but die thinking the next grand idea is around the corner.

There is never enough. If Ideas are wealth, Life is to be lived to its fullest. The trader that gives up simply to be rich and preserve their riches has given up on their Ideas. Like the Artist that has sold out, simply producing copies of his once great work. Their admitting that it was either great timing or luck; not skill and belief that their Ideas still matter.

Free souls. Comes from the empowerment of wealth coming from your thoughts.

Drawn to excess. Because Ideas are regenerative, its tempting to believe everything is. Like the young that are blind to time. Or the athlete that believes there is always another game, tomorrow.

Trading Thoughts

The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day — and you lose more than you should had you not listened to hope — to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out — to soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.

When you’re in a losing streak, your ability to properly assimilate and analyze information starts to become distorted because of the impairment of the confidence factor, which is a by-product of a losing streak. You have to work very hard to restore that confidence, and cutting back trading size helps achieve that goal.

When I get hurt in the market, I get the hell out. It doesn’t matter at all where the market is trading. I just get out, because I believe that once you’re hurt in the market, your decisions are going to be far less objective than they are when you’re doing well. If you stick around when the market is severely against you, sooner or later they are going to carry you out.

The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading… I know this will sound like a cliche, but the single most important reason that people lose money in the financial markets is that they don’t cut their losses short.”

Focus On Playing To Win – Want To Know Why?

The focus on avoiding losing is an easy condition to slip into.  I found it especially so if you’ve had some tough periods in your life.  Perhaps you lost a business, blew up a trading account or went for that promotion and failed to get it.  

It is particularly easy when you are taking down data to analyse your performance as most effective performers do.  That data is right in front of you.  Clear as day.  You can see exactly how many losing trades you have had, how many losing days, weeks etc.

You have an understanding that it’s all about probabilities and that if you follow the old saying “limit your losses and let your winners run” you can be a successful trader with a seemingly bad win rate (30-40%).  As long as your winners outshine your string of small losers you will be OK.   (more…)

Trend Following Lessons from Jesse Livermore

Remember, you do not have to be in the market all the time.
Profits take care of themselves – losses never do.
The only time I really ever lost money was when I broke my own rules.
Throughout all my years of investing I’ve found that the big money was never made in the buying or the selling. The big money was made in the waiting. (more…)

List of Things I Do When I Plan a Trade

planfirst1. My better trades come when I have found a place to quietly think about the trade idea, before I take the trade. I lay down for a few minutes and let my mind roam. This settles me down at an otherwise tense moment. It also allows me to clearly consider what I like or don’t like about the trade.

2. It’s important to me to ignore outside influences when I am planning a trade. I’d rather pay attention to my own reasons for the trade, instead of someone else’s views of the currency pair that have nothing to do with the indicators and other things that I look at when wanting to buy or sell. (more…)

Winning Traders -Never Quit

1. They accept losing trades quickly but it does not define them, they learn and try again. This trade more wise than the last one.
2. They compartmentalize emotions by not blaming themselves but understanding the historical expectancy of their systems returns. 
3. They have a bias toward action by constantly doing things that move them closer to their goal of being a rich trader. (Homework, chart study, reading, being mentored, back testing)
4. They change their minds sometimes, they know when to stop doing something that does not work and move in the direction of trading success through new lessons. 
5. They prepare for things to go wrong through risk management an position sizing  instead of just going naively toward their goals they are ready to make adjustments as needed.
6. They’re comfortable with discomfort, they will accept losses and draw downs in their method, they are willing to pay tuition to the markets to get to where they want to be.
7. They’re willing to wait, they patiently improve each day setting themselves up for those winning trades that will be very profitable in the future.
8. They have trading heroes that inspire them to be better than they are now and give them the hope of achieving their dreams.
9. They have more than passion they are on a mission, their desire for success gives them the drive to not quit until they win.
10. They know only time separates them from their goals of wealth.

Remember These 13 Points

  1. Predictions do not work as tomorrow is uncertain. We will only boast about things we have predicted right and talk nothing about the other half we got wrong.
  2. Skills can bring us moderate success. However, luck is needed to be a big success. (credit to Jon)
  3. We tend to credit our successes to good skills and blame our failures on poor luck.
  4. Some of us rely on luck (most unknowingly) by investing for high returns (and losses). A few of us will make big money but most of us will end up much poorer.
  5. Some of us deliberately limit the luck factor by choosing investment products with capital guarantee and guaranteed returns. None of us will make big money but none of us will be very much poorer.
  6. We need to know how much we can afford to lose (financially and emotionally) before deciding to be No. 4 or No. 5, or somewhere in between.
  7. We have many biases. The degree of success in investing or trading depends on how much we can keep our biases in check. No, we cannot remove our biases totally.
  8. Confirmation bias – we see what we want to see. We seek out evidence to validate our investment decision and ignore those that suggest otherwise.
  9. Availability bias – we are influenced by the things we observe. If people we knew made a lot of money through property investment, we will think that properties are the best investments in the world and develop a preference for it.
  10. Loss aversion bias – we want to be compensated for high returns before we decide to take the risk to invest. We often wait for markets move and show high returns before we want to invest. We are not interested if markets are not moving.
  11. Hindsight bias – we tend to say “I knew it” after an event has happened.
  12. Survivor-ship bias – we only get to hear stories of successes but many stories of failures were untold.  See No 2 and No 3.
  13. Most us do not know what we want in life. We think we will be happier with more money.