TRADETHINK ARTICLES : Why Exits Are More Important Than Entries

FutureSource.com: Fast Break for Traders

November 21, 2007

Market Overview Edition

Today's Featured Article

Why Exits Are More Important Than Entries

By Chris Morse

There are two basic decisions a trader will make during a trade.   
             
1. When to enter the trade.
2. When to exit the trade.

Most traders will have some type of system or set of indicators showing them when to enter a new position. For trend traders one will usually look for either a breakout or a pullback. Once the signal is set the trader will enter the market.

A Trade Does One of Two Things

Once a trade has been placed it will do one of two things. It will either move in your favor or it will move against you. If you are long you want the market to go up. If you are short you want the market to go down. Depending on whether or not the trade moves in one direction or the other will typically dictate what the trade will do next. Some traders will use plain old gut instinct (not recommended). Others will have a percentage based exit and or a profit target.

The entry is relatively the easy question to answer. Where do I get in? Human nature will tell the trader something different once they are in the trade. Most traders let human nature interfere with their trading emotions. If a trade goes up the trader will often want to take the profit very soon right away (people don't like to loss). If the trade moves against them they will hope for the trade just to come back and break even for them. The markets will typically do the opposite of the trader's emotions. A losing trade will usually keep moving against the trader until it is too late and the winning trade that was taken off the table too early will keep going up.
It makes sense that paying greater attention to your trade exit is more important than your trade entry. How can we accomplish paying more attention to the exit than the entry without human emotion taking complete control over our trade decisions? I like to have a good set of trading rules and criteria before even entering a trade.

Let Your Winners Run and Cut Your Loses Short.
Using an automated type of trading system can help to take away the emotion of where to set the all important entry and exit prices/stops. I follow Trade Think and Trade Think gives precise buy and sell signals for every trade. Once in a trade the system will immediately place a protective and trailing stop. There is no emotion or discretion involved. The protective stop is for security purposes just in case the trade moves against you right away and it is designed to keep loses as small as possible and to exit a loser as quickly as possible.
The trailing stop or exit is designed to tighten up and protect profits and at the same time allowing the trade to keep moving if it is still going in your favor. I have seen too many trades lately where the market just keeps on going up. You need a strategy for letting your winners run.
Market Movers
2007 has seen many great market trends in commodities markets. Here are a few among the big commodities moves this year.

* Crude Oil has moved up over 50% from just $60 a barrel in January to over $90 a barrel recently.

A system will give you the discipline to exit a market and bank profits. The system will then enter the trade again for a continued move.

* Wheat has moved from just over $5 a bushel in January to over $9 at its October highs.

Without a solid exit strategy it is almost impossible to take this much out of a wheat move.

* Gold had moved from over $600 an ounce in January to over $800 an ounce this year.



Here is a move for over 90 dollars. This shows why exits are so important.

The US Dollar has moved lower to under 76.

Without a good exit strategy would you really still be in this trade?

The Euro Currency is trading at 1.47 to the Dollar. The Euro was at 1.27 in January.



Would you have the discipline to stay in this trade?

These are just a few of the moves for 2007. Many traders were able to spot the trends and participate in some of these markets this year. Most traders that participated exited out of their trades way to early. They did not have the discipline or trading method to stick with their trades.
Had a trader followed a strategy like Trade Think that allows winners to run and get out of loses before it was too late they probably would have done better with their trades this year.

The Bottom Line
When you are in a trade it is impossible to know whether the trade is a winner or a loser until you exit the trade. This is why exits are so important. The exit is where you decide how much of a loss or how big of a winner you have. Being prepared to exit with precise money management and trailing stops will help you get the most out of your trades.

I cannot stress the importance of trade exits enough. So many inexperienced traders just like to shoot from the hip or place a profit target. A profit target would have exited almost all of the trades above way too soon. You really need a dynamic way of placing exits with trailing stops.

Don't Trade with Money You Can't Afford to Lose

Disclosure: Commodity trading has large potential rewards, but also large potential risks. You must be aware of the risks and be willing to accept them in order to invest in the futures markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to buy/sell commodity interests. Users of the software are solely responsible for the operation of the software and trade postings to this website are either only as examples of how the software works or the results of operation of the software after the market closes provided to licensees of the software only to help validate their operation of the software. Trade Think does not manage any money or provide trade or investment recommendations.

Notice: Returns are hypothetical. Hypothetical or simulated performance returns have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since trades have not actually been executed, the results may have under or over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight, no representation is being made that any account will or is likely to achieve profits or losses similar to those shown.

 

TRADETHINK SHOWS YOU AUTOMATICALLY:

• when to enter the trade ... • where to enter the trade... • trend direction ... • when to exit the trade ... • where to exit the trade ...

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. INVESTMENTS IN FUTURES INVOLVES HIGH RISKS AND YOU CAN LOSE A LOT OF MONEY.

FUTURES TRADING HAS LARGE RISKS. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDER TO INVEST IN THE FUTURES MARKETS. DON'T TRADE WITH MONEY YOU CAN'T AFFORD TO LOSE. YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN THE FUTURES INDUSTRY. IN SO DOING, YOU SHOULD BE AWARE THAT TRADING FUTURES AND OPTIONS ON FUTURES CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE VALUE OF YOUR ACCOUNT. THIS IS NEITHER A SOLICITATION NOR AN OFFER TO BUY OR SELL FUTURES INTERESTS.

USERS OF THE SOFTWARE ARE SOLELY RESPONSIBLE FOR THE OPERATION OF THE SOFTWARE. TRADE POSTINGS TO THIS WEBSITE ARE EITHER ONLY EXAMPLES OF HOW THE SOFTWARE WORKS OR THE RESULTS OF OPERATION OF THE SOFTWARE AFTER THE MARKET CLOSES. THIS IS PROVIDED TO LICENSEES OF THE SOFTWARE ONLY TO HELP VALIDATE THEIR OPERATION OF THE SOFTWARE. TRADE THINK DOES NOT MANAGE ANY MONEY OR PROVIDE TRADE OR INVESTMENT RECOMMENDATIONS. PROSPECTIVE TRADE THINK CUSTOMERS ARE ADVISED TO MAKE DECISIONS BASED UPON THEIR SPECIFIC CIRCUMSTANCES AND NOT MERELY ON THE INFORMATION CONTAINED ON THIS WEBSITE. THIS BRIEF RISK DISCLOSURE STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THE FUTURES INDUSTRY, WHICH SHOULD BE CONDUCTED INDEPENDENTLY BY YOU WITH THE EXPERTS OF YOUR CHOICE.

ALL TRADING INVOLVES HIGH RISK. THERE HAVE BEEN NO PROMISES, GUARANTEES OR WARRANTIES SUGGESTING THAT ANY TRADING BY TRADE THINK USERS WILL RESULT IN A PROFIT OR WILL NOT RESULT IN A LOSS.

ALL RETURNS PRESENTED ON THIS SITE ARE HYPOTHETICAL. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

TRADE THINK AND ITS CURRENT EMPLOYEES HAVE HAD LITTLE OR NO RECENT EXPERIENCE IN TRADING ACTUAL ACCOUNTS FOR ITSELF OR FOR CUSTOMERS. BECAUSE THERE ARE NO ACTUAL TRADING RESULTS TO COMPARE TO THE HYPOTHETICAL PERFORMANCE RESULTS, CUSTOMERS SHOULD BE PARTICULARLY WARY OF PLACING UNDUE RELIANCE ON THESE HYPOTHETICAL PERFORMANCE RESULTS.