In order to exit trades sensibly, there are some factors you should take into account. In trading, your exits matter the most rather than your entries, and hence you should always have a sensible and well-established procedure for exiting your trade. Before moving further, I want to ask you a question. How many times you have been in a trade, where you took the entry, trade went in your direction up to a certain extent, you felt confident about that trade, and after that, it pulled back, and your green PnL came to red. After this, you panicked and exited that trade at a loss or at breakeven, and after your exit, that trade went in your direction and hit the target.
I know many of you might have experienced this situation, and to avoid these instances, you need a well-defined exit procedure, which we will discuss in this blog.
This is the most basic yet most important rule of trading. Many new traders, when they place a trade & it starts to go against them, they try to widen their loss by shifting their stop-loss wider. This is a blunder in trading.
Before taking entry into the trade, think twice about your stop loss and position sizing and then take an entry, but once you place your stop loss, it should always be moved towards your trade’s direction, not against it. Although, in that process, you may think that the trade will come back and I should slightly shift my stop loss against the trade but don’t even try to think about that. Once you decide that this is my plan, this is my entry-level and my stop loss level, then stick to that trading plan from the start, do not try to change it.
When you trade, there is always the possibility of losing money. Your task as a trader is to take a calculated stop loss or trail your stop loss and keep on securing your profits until the trend is your friend! I have observed that many traders, when they take a trade, and when it goes in their direction, they shift their stop loss to breakeven, which is the right thing to do because as a trader, you should always manage your downside. Still, when their stop loss gets triggered out, they get frustrated & they end up doing revenge trading, which is not at all a good thing. Here, you need to understand that the breakeven is much better than a loss.
Now, I will discuss why traders fail to follow these simple rules. Most common reason is overleveraged positions. When traders trade with overleveraged positions, they are already under pressure. Suppose, for example, a trader has taken an overleveraged position, and that position is now in slight profit. He is definitely going to have a tough time booking a profit on that trade because he has already taken a quite large position relative to his account size and when a trade goes against his view, he will be paralyzed. He will start thinking about every possible reason for market reversal while neglecting the stop loss. I know many of you would have experienced this situation.
My simple solution to this problem is to understand the law of random distribution and realize that you will not make a profit in every trade.
This is probably the most challenging thing to do, but there is no turning back once you do that! As a trader, you have to constantly cross-check whether your next decision is taken emotionally or without emotions.
Out of emotions, traders commit several mistakes, such as moving your profit level further ahead. You should not do this; it’s a good thing to do when the market is trending, but you should always consider price action before extending your profit target; you should not move your target based on your emotions because, in the end, you will end up booking smaller profits.
In case of stop losses, you need to be more strict as compared to profit targets. As I mentioned before, you should always move your stop loss in only one direction, “in the direction of your trend”. Also, when you take a trade, and it goes slightly against you, don’t exit in panic; allow the market to hit your stop loss because that is the right thing to do. These are the tactics you can use to set up the stop-loss.
I hope that this article will help you in exiting your trades sensibly rather than randomly exiting your trades. If you have any suggestions regarding this article, please let me know in the comment section; I will be more than happy to hear them!
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