I will post my trading chart later this evening…it was an exceptional day in that the market basically went straight up, with a short respite over the noon hour.
Which brings me to a timely topic, and an oft talked about topic We’ve talked some about entries, at least in a simplistic manner, but the topic of exits has not come up. If ever there were a plethora of theories on a subject, when to exit a trade ranks near the top and few traders are without some sort of opinion on the topic that differs from the next trader…and so on.
On one hand, it’s nice to let your trades run as long as you can. Of course, this is some dicey business since the market does not post neon signs indicating just when it is going to change direction. One hard and fast rule I follow is this:
Never let a winning trade become a losing trade!
This goal can be accomplished through many different means, but I still see the most errors, including my own, at exiting at the proper time. You may have read my own disgust with myself when I exit a trade several points to early. Lately I have been placing my sells 3 points (or 12 ticks) above my entry point. I have done this to take advantage of the volatility in the market lately as it can be very difficult to manually exit a trade without losing a bundle of ticks. That being said, it can be very unnerving to exit at 12 ticks and watch the index price slide up another 4 points. It is a sinking feeling indeed. Essentially then, I have been setting up bracketed 12 tick trades at my point of market entry.
Now it would be safe to point your finger at me and say, “Dave you are trading like a wimp”. You would probably be on safe ground in saying so, but the fact of the matter is simple, this low volume market has made me a bit wimpy. A bird in the hand may be as good as two in the bush.
Under normal trading conditions I use the slower of the stochastic lines to determine my exits. When that line begins a divergence from the direction of the trade I am in I exit. However, the psychotic nature of the market traders lately would force me to have much faster reactions than I have been able to exhibit. I will devote a full blog entry to using the stochastic to exit trades in a future post, as it takes a bit of explanation to assimilate the information.
I am also very cognizant of price exhaustion while in a trade, and price exhaustion can provide a piece of your exit strategy if used properly. Higher highs, and lower lows and deviation from market direction, a fractal, are indications of a possible change in market direction. Again, with so much information to cover, I will save extended discussion of my pet market direction indicator, the fractal, for later discussion. For now, you could consider successive higher highs and higher lows as a continuation of a market directional move to the upside, and conversely, low lows and lower highs as the corollary pattern on the short side.
