Many traders have an entry-weighted strategy. They know the fundamentals. They’ve calculated the amount they will risk on a trade based on their position size and the placement of their stop loss. They’ve set signals for entry.
However, then they expect the trade to take care of itself, not realising that how they manage a trade after it has been opened is one of the most important factors in securing profits. Although a hard stop will allow you to get out of a losing trade without too much of a loss, what should you consider when exiting a winning trade?
Having a profit target sounds like a logical solution, but then how much of a profit should you target, and how do you know whether you’ve closed a position too early?
One method is by setting multiple targets. If you set your first target at the initial risk taken you have not only made back what you originally risked on the trade once this target is hit, but you are free to let your profits run on the remainder of the position.
The simplest way to let your profits run is to set a trailing stop. A trailing stop functions like a conventional stop loss in that it will close your position automatically should the market turn (closing it at that level, or the closest level through which the market trades). However, unlike a conventional stop loss, which remains static, a trailing stop follows the market as it moves in your favour. Trading This means that if you were long on some Share CFDs valued at $20 each and you set a trailing stop 10 cents behind your starting price, if the share price rose to $23, your stop would rise to $22.90. If the share price then turned and triggered the stop, you would have made a profit of $2.90 per share (excluding commissions, overnight interest, and any other charges).
So you have curbed your risk with your first target, and let your profits run with a trailing stop. So how long should the process take?
A simple way to establish the length of the trade is to refer to the charts you are using – if you are waiting for an economic announcement and are looking at weekly charts, your trade may take weeks or months. If you are looking at a breakout of support that has been developing for weeks, your trade may last for a few days. If you’re examining moving average crossovers on 5 minute charts, then your trade is unlikely to last more than a few hours.
When your time is up, it’s time to exit the trade.
No second-guessing – traders that question their systems are ones that are more likely to lose their hard-won gains. And with developments in mobile trading, you can easily monitor your open positions from anywhere and exit at the right time.