Looking through the articles this morning on TraderPlanet, I came across one that looked at, arguably, the most pressing dilemma facing both short-term and long-term traders – when to exit a trade. The author, Darrell Jobman, a weighty voice of knowledge on TraderPlanet, writes about identifying exit points in a trend with a VantagePoint strategy, and that is helpful to those who use the software, but the larger point for all traders is the question: when do I exit my trade? The opening paragraph of Darrell’s article lays the issue out quite simply and clearly …
Once you have gotten into a trading position in the direction of a trend, you want to ride it for a while if you are a long-term trader. But, as the market makes its typical gyrations, the dilemma always is whether to stay in or get out. At what point will the trend end or extend?
The funny thing about maxims in trading, and in life in general, is that they only apply generally, meaning that over time, they hold true, but in specific contexts, they might well be counterproductive to what your immediate goals are. For example, one such maxim is “cut your losses short and let your profits run,” a direct reference to getting out of a trend.
I would argue that in times of low volatility and market stability, one can afford to follow this advice with tight stops on the down side and wider stops on the up side. However, in times of high volatility and market instability, tight stops on the down side just might bring you more losses from stopping out and wide stops on the up side just might lose you a hefty portion (if not all) of your profit, whereas tighter stops on the up side just might secure your profit. In other words, you might not want to be so quick to cut your losses short with tight stops, and you just might not want to let your profits run with wide stops. On the down side, you might want to risk a bit more with wider stops to avoid stopping out on a wild, one-time market swing. As to the up side, you might be better off tightening your stop to avoid losing much of your profit on a sudden and definitive reversal.
The point here is that we all face the dilemma of when to exit a trade, but the question has to be answered within the context of the current market condition. It is not as simple as cut your losses short and let your profits run. Yes, this is the strategic goal always, but, realistically, one has to define the parameters of this goal based on how the market is behaving. Thus, in riskier markets, one has to risk losing a bit more, as well as risk making less profit in order to stay ahead of the game.
Trade in the day; invest in your life …
