Knowing when to exit a trade is as important as choosing the right entry. Many traders struggle with exiting a trade when it comes to setting a target or a stop loss. When analyzing your trades and position exits, it is important to remember not to judge your results based on a singular trade - Judge your trade based on a large sample size, using a review process like the one outlined in a previous article. In this article, I will share my experience and tips on how to time your exits effectively.
Defining Targets
Defining a target is important in any trade, as it allows you to take profit at a desired price level. There are two common methods to define targets: technical analysis-based and risk-to-reward based.
Technical Analysis-Based Targets:
Previous swing high/low
Previous supply/demand zone
Moving averages or VWAP
Prior day reference points: Prior day high or low
Daily/weekly/monthly pivot levels
Risk-to-Reward Based Targets:
When taking a trade based on a risk-to-reward ratio of 1:2, for example, you aim to make two points for every one point of risk. You would put an initial stop loss (SL) at 1R of your position, which is the amount of risk you're willing to take for that trade. For instance, if you buy something at 100 and put an SL at 95 with a target of 110, you're risking 5 to make 10 points, which is a 1:2 risk-to-reward ratio.
Setting Stop Losses (SL) and Trailing Stop Losses
Stop loss (SL) is an order that you place with your broker to limit your loss in a particular trade. It is essential to set an SL in every trade to prevent a big loss that could harm your account balance.
There are different methods to define SL:
Based on technical analysis, such as the latest swing high/low or the nearest support/resistance level.
Based on risk-to-reward, where you place the initial SL at 1R of your position, and then you can move it to breakeven or beyond it as the trade progresses in your favor.
Trailing Stop Losses:
A trailing stop loss is an advanced type of SL that allows you to lock in profits as the price moves in your favor. For example, if you buy a stock at 100 and set a 5-point trailing stop loss, the stop loss will follow the price higher as long as it moves in your favor. If the price falls 5 points, the trailing stop loss will be triggered and close the trade.
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When to Exit a Trade
There are three possibilities when you enter a trade:
The trade moves in your target direction, and you reach the 1R target (105). Then you have three options:
Move the SL to cost (100) for the entire position.
Book 50% of profits and keep the same SL (95).
Book 50% of profits and move the SL to cost (100).
Each option has its pros and cons, and it's up to you to decide which one suits your trading style and risk appetite. If the price falls and hits your SL, which is now at 100, don't be too hard on yourself. You chose the exit strategy based on your comfort level, and it's time to move on and look for the next trade.
2. The trade doesn't move in your target direction, and it stays range-bound for some time. If the trade doesn't work within a predetermined period of time, it's better to exit. Review your position again and see if your view is still valid. Remember, the best-timed trades work and give results almost immediately.
3. The trade hits your SL. This is the easiest outcome of all, and you're probably familiar with it.
In conclusion, knowing when to exit a trade is crucial for a successful trading career. By defining your targets and stopping losses using technical analysis or risk-reward ratios, you can improve your timing and increase your chances of making profitable trades. If you currently struggle with exiting your trades and want another experienced trader to take a look, book a one-on-one coaching session or join the Trader’s Thinktank and get some help from our community. Remember to be flexible and adapt to different market conditions, and don't be afraid to exit a trade if it's not moving in your favor. By following these tips and developing a sound trading strategy, you can achieve your trading goals and become a successful trader.