Why Every Trader Needs A Trade Exit

Whether you are a novice or a veteran in trading, you should know that in whatever market you are planning to be active in, you must have a trading system that has all the indicators and factors figured out to help you minimize your losses. That is should the market starts to turn against your favor. One of these would be a predefine trade exit, which can be considered a part of any risk management system that you can set into place early on.

In all probability, you have set up a system wherein you can easily find and get into a really good trading opportunity. And with that you must have a maximum loss already in place. If you are not yet sure what it is, what it simply means is that you have already predefined the certain factors or situations wherein you will know when it is time to get out of that market or trade. Otherwise you will keep on losing money because you do not know when to stop, even if you think that the market would eventually turn to your favor, which really seldom happens unless you are already a master in trading.

We call these stops and there are two kinds of stops. One is the initial stop and the other one is called the trailing stop. Let us first define the first one.

An initial stop is your predefined point on when you will be exiting a trade. To put it simply, while it may not sound good to you, it is knowing and admitting that are losing heavily in the trade and so it makes sense to bail out. Otherwise you will continuously lose money. This is a part of a good trade exit that you should have in place from the very beginning.

The trailing stop is quite similar to that of the initial stop, but the major difference is that your stop point or exit point is not set on a fixed price, but rather on the highest price point during the time that you entered a market or trade. So what this means is that you are trailing or following that highest price point and make your exit based on where it is currently placed. This is a good strategy to minimize your losses and to actually still gain as much profit from your trading.

The hard part of this method is in balancing when you are raking in the profit before the trend finally stops. This balance also means you should know when you are already parting off too much of the profits because you are already on the losing end.

The great thing about trailing stops is that it will allow you to take advantage more of the trend while actually minimizing your overall losses, which is something that is common in every trade.

If you go through most stock trading strategies, you will find out that it is indeed a necessity to define your stops very early in the game. Preferably before you even enter a trade or a market. This way you will avoid taking in great losses when you could have already exited the market at the right moment, if only you have stops to guide you.

Just keep in mind that having a trade exit is a necessity for every trader, even for a legend like Nicolas Darvas. You should also understand that it is normal to every now and then for you to experience some losses. What sets good traders from bad traders is the capability to know when it is time to pull the stops.

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