Have you completed lesson 6’s action steps?
If not, complete those steps before reading on.

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"you got to know when to hold 'em and know when to fold 'em" - Willie Nelson

Lesson 7

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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

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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.

MUST DO ACTION STEPS: Using your copy of Trading Secrets Revealed and your entry signals package - write down in plain English - your exit rules.

IMPORTANT:

At this point you should have now have fully documented the 3 components of your trading system… That said, we have not yet discussed perhaps the most important area of designing any trading system. It is this area that will provide you with the confidence you need to trade your system. Be sure to keep reading.

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