The Three Primary Reasons to Close a Trade
In my opinion there are three primary reasons to close a trade:
- Target price is hit - obviously the preferred reason.
- Stop Loss is hit - obviously the least preferred reason.
- The trade moves in the right direction but stalls - the often overlooked reason.
Over the years I have consulted with many traders and in my opinion far too many do not pay close enough attention to the third reason. This is a critical mistake - particularly in short term trading today's markets. Most markets today are like a skittish herd of cattle - just waiting for the next gunshot, car backfire or thunder clap to start a stampede in some direction.
The reason that we believe that number three above is critical is because it can save a trader a lot of money by taking a small profit and exiting a market before the position turns into a loss.
I think that the reason too many traders do not pay adequate attention to exiting when the market stalls is that there is no specific price value involved. Target price is specific - and so is stop loss. The proper exit for a stalled move is not specific and is much harder to detect.
My method of detecting it is simple to state, but a bit more complex to fully explain, but is essence I get out when the pattern which caused me to enter the trade appears to have broken down.
I am a short term trader and I trade often when I am working, so saving $50.00 here and there on a trade can really add up at the end of the day. I have found that the secret to consistent trading profits is more about minimizing losses than about maximizing gains.
For me that is a big reason to make the third reason for exiting a trade a very high priority in my trading method.
I welcome traders to visit my blog, tradingbetweenthelines.com to learn more about my short term trading strategies - especially for the futures and FOREX markets. And please do make your thoughts about my comments known - especially if you disagree with me. I love people to disagree with me because talking with them may result in my learning something that I might never learn from only talking with those who agree with me.