TIMELY
EXIT
“Successful Trading Is
Not About Being Right.” – VTI
What is
your tolerance for pain? Consider the following scenario. You have 10% of your
account balance on the line. For the past two days, prices have been going in
the direction you had anticipated, but today, an announcement was made that
caused a market move that caused all your profits to be wiped out in an hour.
What will you do? See if prices will move back to where you are okay again? At
times like these, it is useful to have a clearly defined trading plan with a
specific exit strategy.
Trading is
inherently uncertain. You never know exactly what will happen next. That’s what
makes the business exciting to some traders but nerve wracking to others. How
you handle adverse events that make prices move against you depends on your
personality. The best way to protect your capital is to use protective stops.
When formulating your trading plan, you must decide how much pain you can
tolerate. How much money can you lose before you have to exit the trade? You
can set this exit point as a formal stop loss, you can use the automatic
settings on your trading platform to set a stop, or you can use a mental stop
(not recommended).
The
problem with a formal stop loss procedure, whether it is a formal order or an
automatic setting on your trading platform, is that a transitory change in
price can ‘stop you out.’ if the placement of your stop loss does not
adequately account for volatility. It’s hard to know how far a stock may move
and a temporary drop can ruin your trading plan when a protective stop is not
set properly. Mental stops may be more useful, but you run the risk of not
being able to exercise your mental stop (think heart attack, nervous breakdown,
stroke, personal emergency, computer failure, etc.). You can decide how far a
stock price must move against you before you will liquidate the position. When
prices reach the exit point, you can decide whether the low price is transitory
or represents a significant change in trend. You can then exit the trade.
This all
sounds good in theory, but depending on your personality, you may not be able
to carry out this strategy. If you have trouble controlling your emotions and
you use a mental stop, for example, you may have trouble closing the trade when
it reaches your exit point. Some people panic and out of fear don’t close their
position when their mental stop is reached. These people may need to impose the
proper amount of discipline on their trading actions by using an electronic
stop or a formal stop-loss order.
Minimizing
trading losses is the hallmark of successful trading, but not all traders are
equal when it comes to their ability to trade decisively under strain. If you
want to trade profitably, you have to work around your personality. If you are
cool headed, disciplined, and are willing to take the risk even under the most
stressful conditions, you can use mental stops to protect your capital. But if
you are easily shaken by choppy market action, you might want to use
electronic, automatic stops to protect yourself. Whatever you do, however,
minimize losses as much as possible. It’s the only way to trade profitably in
the long run.
Author:
Joe Ross
The article
is ended with 3 quotes below:
“Getting out of trades too early with tiny
profits very often is a sure road to bankruptcy. Sure it feels good to take
some off the table right away…but it’s hardly ever successful in the long run.” -
Marco Mayer
“To make money out of these still requires
good management. It is always challenging to see some traders make money from a
trade while some traders lose money from the very same trade.” –
Joe Ross
“Don’t let those losses lead to mindset traps
that can stop you from taking the next trade. Change the way you think about
your loss, and you’ll regain your motivation. I guarantee it.” –
Louise Bedford
