When people first get start trading, they think trading is about making good analysis of a trade before you enter the market.
What experienced traders know is getting out is the important part. Getting out of trades is how money is made and lost in trading.
The unfortunate truth is there is nothing you can do to change the direction of the market. Once you make a trade, the market will move where it will move – and no wishing or hoping or even praying will make it change.
All you can do it hold on if the market is going your way, or get out when the market goes against you.
But not all exit strategies are created equal.
I am about to share with you a powerful exit strategy which can put literally thousands of dollars in your pocket – and save your account from total destruction if used properly.
Trends don’t happen all the time, but they do happen frequently enough it’s usually profitable to trade them if you know how.
The exit strategy which you can use to make more money in the markets is simple. The Trend Following 101 system uses a simple exit – it exits on the lowest low of the last 16 days.
But this isn’t the only way to exit the markets. I am about to suggest a new method to exiting trades which makes gives the market plenty of room to run, but makes the stop collapse in when the market isn’t going in the direction of the trade.
Here’s the rule:
For every 5 days the market does not move in the direction of your trade, move the stop to the next extreme of the exit window.
For example, if you are long crude oil, and crude doesn’t make new highs for 5 days, use the second lowest low of the last 16 days instead of the absolute lowest low of the last 16 days as the exit price.
If Crude doesn’t make a new high for 10 days in a row, use the 3rd lowest low of the last 16 days instead of the lowest low.
You’ll find this quickly moves up the stop during consolidation periods. Instead of waiting as the market moves back and forth, you’ll exit the market. This will preserve your capital and give you more piece of mind.
Consolidations are among the most frustrating parts of trend trading, and many, many trades will keep your valuable capital tied up for weeks after they have ended the trend. This method moves up the stop more quickly.
And if the market isn’t going in the direction of the trend, it either means the trend has ended, or your new entry will be so close if the trend begins again, you’ll be right on it.
So there you go! Here is a totally new exit strategy for trend trading, and one that helps to improve your capital usage. Once you start thinking about ways to help out your trading, it becomes difficult to stop.
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Michael Sankowski spends a lot of his time applying quantitative mathematics to financial markets. When he's not playing the guitar, he has been a professional trader for 20 years. He's traded billions of dollars on four continents and is a well-known financial writer. He's a CFA, CAIA, and has created patented Futures products. He's here to help you make more money (and especially not lose your money).
