CHAPTER 18
Exits
Basically, there are four major reasons to exit a trade:
Limiting a loss
Taking a profit
End of event
Money better used elsewhere
Let’s take a brief look at each one of these reasons and when they should be
used.
Limiting a Loss
I recently participated as a speaker in a seminar, where I asked the other partici-
pants which was the most common reason to exit a trade. About two-thirds of them
said taking a profit or cashing in on a good trade. Only one-third immediately said
that the stop loss probably was the most common reason. From what you know
about trading, which one of the two groups do you think is right?
As far as I know, it is group two, which said the stop loss. Just take a look at
the systems we worked with in Part 2. None of them has more than 50 percent
profitable trades, which means that a majority of the trades are exited with a loss,
and logic has it that’s the only way it could ever be. Think about it: When you enter
a trade, you might have a slightly better than 50 percent chance that the trade will
go your way, but because you also need to look for a risk–reward relationship of
about 3:1 to make the trade worth the risk you’re assuming, there is still a much
larger likelihood that the market will move against you by one unit (or 1 percent,
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