Thoughts on Entry and Exit points

Why did you enter a position on your last trade?

Maybe it was at a support or resistance level. Or did it breakout from a trading range? Did your system that you purchased generate a signal without you knowing why? Or maybe you entered because you felt the market was overbought or oversold. There could be a multitude of reasons on why and where you have entered a trade.

First of all you should have a trading plan in place to determine your entry and exits. All successful traders know exactly why they have entered a trade and more importantly they know exactly where they want to get out in case a trade goes against them. Many novice traders pay far too much attention on their entry levels only. Your exit point is just as crucial and deserves equally as much attention.

Once you have entered a trade based on your opinion or methodology, you are at risk. At his point you should already have a stop in place for protection. Assume that the trade moves in your direction and you are now in profit. What is the best thing to do?

There are various schools of thoughts on this matter. Some say raise your stops from the recent pivot low so that you are trailing the market, others say keep your stop fixed at the lowest low so that you can give your trade room to move.

If you are a conservative trader then yes you would want to trail your stops to minimise losses. However this method does have its faults where your stop may be triggered only to find that your trade moves back in its original direction.

One of the safest trading strategies to employ after your trade has been initiated is to at least get to break even. In other words, your trade moves into profit and once it has cleared your entry level, remove the stop from where you had originally placed it and move it to your entry price.

Example: Long entry on stock ABC is at £12.50 with a Stop at recent low of £12.00 the risk on this trade is 50 points.

A few days later your stock is now trading higher at £13.50. Remove your stop from £12.00 and place it at your entry level of £12.50.

Your risk is now at Zero unless of course in an extreme event where the market may suddenly Gap Lower below your Stop Level. (Spreadbetting allows you to use Guaranteed Stops where you can only lose a specified amount).

This method of breaking even is one that I recommend, so that you can at least feel comfortable knowing that this is now in a sense a free trade and can let your profits run.

What about exiting a trade?

You have heard the saying “Cut your losses and let your profits run.”  Well that’s great in theory but still difficult to apply for a novice trader.

Have you ever been in a trade which is profitable and then starts to pull back to eat away some of your profits? You then exit because you do not want to give back your profits. That is fear coming into play. And now after you have exited your trade moves back in the direction you first anticipated. So what do you now?

You jump back in chasing the market and hoping to catch more profits. This is greed.

This scenario plays out again and again in the financial betting markets. How can we deal with these emotional situations?

One way is to set yourself a target for exits based on risk reward ratios. Let’s say that your current position has a 50 point risk. You would want to use a strategy that at least gives you 3:1 profits on your trades. So for every £1 you are risking, you would want to receive £3 back. This means that you can afford to take a loss then another loss followed by a profit and still stay in the game without damaging your account. For your 50 point risk you will want to aim for a trade which will generate 150 points in reward.

Of course we never know if our profit target will be reached, but if you have a decent strategy and basing it on the above method will ensure your survival in the markets with consistent profits.

On the other hand you can aim for much larger profits as taught in Trend Trading. This method would imply that your trade will reach for the stars hoping to generate huge profits. Great in theory but unless the markets are in a runaway mode this can be difficult to achieve and can get very emotional with the up and down swings. But still this is where the big money is made.

Read my previous articles on “Trading or investing” and “What is a trading plan”

Just remember, if every trader knew exactly where to get in and where to get out then trading would be easy and the markets would be too efficient.

Have a great week.

Sandy Jadeja | Chief Market Strategist

sjadeja@odlmarkets.co.uk