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Trade Exit - How To Cut Losses And Let Profits Run
Cut your losses short and let your profits run. This is the essence of your trade exit rules. Cutting losses short A protective stop protects your trading capital, it is your initial trade risk. Before a trade is even entered your should know where your protective stop will be - this is your maximum loss (barring any slippage on the exit). There are many different ways to determine a protective stop on a trade: Set dollar amount - Say $500 on every trade Percentage retracement - Say 10% from the entry price Volatility - A percentage of the average true range of the previous x bars Moving Averages - the opposite of the moving average entry Channel breakouts - the opposite of the channel breakout entry Based on areas of support and resistance stops Time - If a position is not in profit after a certain length of time then it is exited. Letting profits run An effective exit technique is also required to allow a successful trade to make the most profit possible and give back the least amount of it. Usually a trailing stop is employed to achieve this objective. A trailing stop moves to lock in profits as the trade moves in the traders favour, it should never be moved backwards. There are many different ways to calculate a trailing stop: Volatility - the stop is calculated as a percentage of the average true range of x periods. Dollar - A set amount determined before the trade is entered. channel breakout - exit a long position at the low of the last x bars. moving average chart patterns - ie move the trailing stop behind each consolidation as it forms. Other forms of exit are: Time Stops - A trade is exited after a certain length of time no mater what. A day trader, for example, will always exit at the market close. Targets - A limit order is placed to exit a position at a pre-defined profit objective. However this tends to break the rule of letting profits run and usually reduces the profitability of a system by cutting short the best trades. Tim Wreford runs Online Futures Trading, a website that provides information and resources for traders. Tim also provides a free day trading system, the results of which are updated daily on the site.
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