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Have you completed lesson 6’s action steps?
If not, complete those steps before reading on.
IMPORTANT:
For a more detailed explanation of this chapter, be sure to work
through your copy of Trading
Secrets Revealed. This chapter, rather than repeating Trading
Secrets Revealed content, is designed to be a quick refresher. |
The Perfect Exit
Buying the correct stock and the correct number of stocks is all to
no avail if you do not know when to exit a position. In fact, having
a strategy that defines your exit is as important as defining your
entry. This is simply common sense. However, most traders do not
devote any thought to this important aspect of a trading system.
Before you enter a trade, you should know where your exits are.
There are at least two for every trade. First, what is your stop
loss if the trade goes against you? Secondly, what is your trailing
stop if the trade moves in your favour? Remember these stops must
be written down. Mental stops don't count.
Sadly, most novice traders are doomed to break the age old rules
of trading by “letting your profits run and cutting your losses
short.” They do this simply by failing to define their exit rules.
The truth is that, psychologically, humans are hard wired into believing
that they must be right.
Here’s what I mean, when the undisciplined trader enters into a
trade they expect to profit from this trade. If, however, the stock
price goes against them, they further feel they are “right” and
justify why they bought the stock by holding onto it until it turns
a profit. Unfortunately, and most likely, their losses are compounded
as time passes.
Similarly to the case of a loss, if the position moves in their
favor, the undisciplined trader sells the position at first sight
of any profit. They have an inherent need to crystallize this winning
trade and be “right”. Clearly, this is in direct conflict to the
rule of letting your profits run.
Both these situations can be avoided by predefining exit points.
Think of setting your exits as an ejector seat when things go wrong
and a seatbelt to strap you in when things go right. As with entry
conditions, exits should be precisely defined and 100% mechanical.
You are now ready to document your exit rules. Using both Trading
Secrets Revealed and the package containing your entry signals,
your next task is to get your exit rules written down.
YOUR EXIT RULES
By documenting your exit rules you have just put yourself into the
top 2% of traders. Congratulations!! You are almost in the top 1%.
Let’s get your exit rules right.
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