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c06 JWBK182-McDowell April 25, 2008 15:54 Printer: Yet to come
Entry Rules and Your Trading System 47real results that matter. Back testing does not account for your trading
psychology.)- Your trading system rules must be written out one by one so that entries
and exits are consistent, clear, and quantifiable.
YOU KNOW WHERE TO GET IN—BUT
WHERE AND WHEN DO YOU GET OUT?Knowing where to get into a trade is just the beginning. Then there is the
important task of knowing where to get out. From a money management
standpoint, this exit decision must be made prior to placing the trade. With
the entry and exit information, you can then mathematically calculate what
your trade size will be, which will control your risk.
From a psychological standpoint, this exit decision must also be made
prior to placing the trade. By identifying your initial stop-loss exit prior to
the event, you reduce your chances of emotional trading, which can lead
to disaster. Knowing that you need to determine your initial stop-loss exit
before you enter a trade is going to put you leaps and bounds ahead of the
average active trader. The next question is, do you know how to decide
whereandwhento get out?
There are a variety of stop-loss exit strategies that you can use in de-
termining your exit. My one word of caution is that you must be surenotto
say, “I’ll get out when the trade goes one point against me,” or “When I lose
$200.00 on this trade, then I’m out.” These are random exit choices and are
not based on constantly changing market dynamics and realities. So, what-
ever trading system you are using, be sure to design an exit strategy that
takes into account current market dynamics.ABOUT THEART©R TRADING SYSTEMFor the purposes of illustrating certain concepts, my examples will be
based on entries and exits that have been identified by theART©R,also
known as theApplied Reality Tradingsystem. This is the system that I
use, and it will easily provide clarity to the entry and exit strategies that
we’ll be discussing.
You do not need to use theARTsystem to use these money manage-
ment techniques. Your primary goal is to understand the theory and adapt it
to work with your system. System selection is a very personal thing, and it
is crucial that you are working with a system in which you have confidence.