A Guide To Exiting Trades Successfully

How many times have you been in a trade that goes in your favor a decent amount of pips and then it starts moving against you and you start to feel panicked? What about being in a trade that is up a nice profit and you decide to close it out only to see the market continue moving two or three times further in your favor without you on board? Is this just “part” of trading or are there things you can do to limit these types of frustrating trading situations? Today’s lesson is going to explain how you can make exiting your trades as simple and unemotional as possible.

Exiting trades is hard for most traders, but it doesn’t have to be. Like most other aspects of trading, people tend to over-complicate their exits and make them a lot more difficult than they need to be. It is the exiting of a trade that truly does separate the winners from the losers in the trading world.

Change the way you think about trade exits

When you think about “exiting a trade”, the first thing that comes to your mind is probably not a stop loss getting a hit for a pre-calculated loss that you knew had about a 40 to 60% potential of taking place. Instead, you probably think more about “rewards” and “take profit levels” when you think about exiting a trade, at least this is what most traders tend to think about it.

It’s pretty normal to think this way, because after all, most of us are initially drawn to trading from the idea of “fast money” or “quick profits” and “rewards”…and so it takes more brain power and forward-thinking to force yourself to think about losses and stop losses getting hit as an equally important part of exiting trades. So, don’t think you are alone if you have a fixation on profits and rewards…just know that you will need to “shift” your mentality on exiting trades if you want to have a chance at making consistent money in the market.

Accept that you simply aren’t going to win some trades

I’m going to tell you something right now that will have a profound effect on the rest of your trading career IF you decide to believe it and build it into your trading and money.
If you feel like you have already mastered your trading strategy and you have patience to wait for it to provide you with high-probability entry signals (you aren’t over-trading), the only other way you can consistently lose money in the market is by mismanaging your exits.

Think about it; if you have over-leveraged your account on a trade and it goes into profit for you, you’re going to have a very hard time taking that profit because relative to your account size you have a large open profit and as you sit there looking at that large open profit all you can think about is how much more you “could” make. You begin to justify reasons of why the market “might” keep moving in your favor and start “counting your chips at the table” by calculating how much more profit you could make on the trade if it keeps moving in your favor.

You need to be flexible but not emotional with your exits

As traders, we have to constantly ask ourselves whether our next decision in the market is a purely emotional one or one supported by logic and by what the price action is actually showing us on the chart.

Profit targets
Perhaps one of the most common mistakes that traders make in exiting their trades is moving their initial target further away ONLY because they think the trade will keep going in their favor. Most of the time, doing this leads to a smaller profit than what you had originally planned, or no profit at all.

Stop losses
You also need to be flexible but not emotional with your stop losses. You can be a little bit more rigid with stop losses than with profit targets. Meaning, with stop losses, it makes more sense to let the market take you out by moving down or up into your stop loss, that way you give the trade the maximum possible chance of moving in your favor.

Sometimes, taking a smaller profit is OK…

This point goes along with what we just discussed about being flexible in your trade exits. But, I wanted to mention this more in-depth since I know there are some misconceptions out there about taking less than a 1:2 risk reward and when / if that’s “OK”.

Set and Forget truly is powerful, use it with discretion though.

Many of you have probably already read my ‘set and forget trading’ article that talks about a very simple trade management technique which, as the name implies, involves setting and forgetting your trades. In other words, after you enter your trades you don’t meddle with them. However, there are exceptions to this rule, because the markets are dynamic and constantly changing…so we cannot afford to be 100% rigid in our approach to trading.

It will help if you think of “set and forget” as more of a “default” trade management technique…not something you do all the time despite what the market is telling you. Set and forget basically just means you don’t do anything if there’s nothing logical to do. It should be your baseline trade management point…meaning, after you enter a trade you don’t move your stops or targets around unless the price action that you see on the chart is implying that you should. You should consider “set and forget” as a nice metaphor for managing your trades with logic and objectivity instead of emotions like fear and greed.

What is a “successful” trade exit?
Finally, you can determine whether or not you exited a trade successfully by answering the following questions:

1) Did I exit emotionally or logically? (“Logically” should be the answer)

2) If I lost on the trade, did I lose my predetermined dollar risk amount (1R) or less? (“Yes” should be the answer)

3) If I won on the trade, did I make 2R or more on the trade? If I made less than 2R on the trade is there a logic and price action-based reason that I exited before 2R was hit or did I just panic because the trade was moving against me? (“Yes” you should have exited logically no matter the size of your profit.


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