Trading System’s Strategy Development III – Trade Exits

One of the most important features of a successful trading strategy is being able to determining when to exit trades with the maximum amount of profit while minimizing losses by closing positions when the market moves against you. It can be argued that an exit strategy is in fact more important than a entry strategy. Numerous different strategies exist in determining when the best time is to exit a trade all with various positives and negatives.  

  • End of Day, one simple and often effective strategy especially if your system is designed to make use of signals to predict daily price movements. It is also particularly easy to back test and work out historic profitability. Be aware that different trading platforms may have different definitions of when the day ends and some markets operate 24/7 such as Forex giving rise to problems. It also allows you to sleep tight at night knowing that you have no open positions. 
  • Stop Loss, a stop loss is another simple strategy used to determine when open positions should be closed. A stop loss allows you to limit the risk you face on each position. The main problems with such an exit strategy is that market volatility is constantly changing and  high levels of short term volatility can cause your trade to be closed prematurely.  Some of these problems can be resolved by using a variable stop loss, though this represents a more complicated proposition.
  • Trailing Stop Loss, in theory a trailing stop loss can present a very good strategy for determining when to exit open positions, as it allows you to maximize profits as well minimizing losses. Though some trading platforms do not offer automatic stop losses which would mean you would have continually alter your stop loss. But if there available a trailing stop loss can be used effectively as an exit strategy if set correctly.
  • Profit Targets, would involve the trader targeting a profit level where the trader would be happy to take the profit. Though this seems to go against one of the golden rules of trading, that you should run with your profits. However a profit target can be useful for very short term strategies (known as scalping) if set with an appropriate stop loss, as long as this combination represents a reasonable risk reward strategy. A Forex strategy which takes a 4 pip profit but will take 10 pip loss, need to be very highly accurate.  

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