Most of the work done in technical analysis is concerned with how to find new trades and how to get on board once a trade setup has been identified.
Considerably less literature is devoted to the topic of getting out of trades.
This article will discuss stop loss exits, profit targets, trailing stops, as well as intertwine some psychological aspects to be aware of while in a trade and/or looking to exit a trade.
- Stop loss. It is often quoted that something like 90 percent of all new traders are out of the game within the first six months of starting.
The reason for this elimination from the game is rarely because these new traders are lousy at picking the direction of the market they are trading. Rather the overwhelming
reason these traders get wiped out is because they trade without a stop loss – an order that when a predetermined price is hit, triggers an order to exit the existing position at the market.
There are many ways to determine stop loss points. You will find that different techniques are best suited for different markets.
One of the most basic strategies is to place stops just under previous low points (if long) or just above previous high points (if short). After running thousands of historical tests on various trading strategies I can say that this is a decent stop loss exit strategy to use in most markets.
If you are doing your own system development and testing you might want to consider adding a wrinkle where the stop loss is displaced somewhat from the previous high or previous low. I have found that a plain stop price, such as “n” number of tics through the previous high or low, is the best way to handle this.
- Dollar stop. This means never risk more then “X” dollars on any trade. This is good as a fail-safe stop to include in a strategy for those infrequent occasions when your other stop loss techniques might be unreasonably far away.
This is a stop loss that shouldn’t be hit very often, but is only there to avoid a disaster. One stop loss technique is to base the stop loss point on the highest high (for long trades), or lowest low (for short trades), since the trade was entered.
For example, when long, I identify the highest high made in the trade and use the low of that day as my stop loss. Unlike a stop loss that is based on the lowest low of the last “n” days, the stop based on the highest high is static until there is another new high.
Depending on the strategy being employed one might also run a stop loss using the lowest low of the highest high day plus “n” number of days preceding it.
- Break even stops. This is when the market moves in your favor and you move the stop to breakeven (entry point), often done in conjunction with an exit on some portion of a multiple lot position. This strategy sounds good in theory and can work in practice, depending on the exits used for that initial position.
Remember though, that many of your wins will be on a partial position and almost all of your losses will be on a full position.
Generally I do not move my stop to breakeven because it is often too tight of a stop. Overall my experience leads me to be a fan of moving the stop as a trade becomes profitable, but not moving it all the way to breakeven.
With regard to multiple lot positions and different exits, you should realize that with each different exit you are trading distinctly different strategies. As such, each entry/exit pair must stand on its own as a profitable trading strategy.
That usually means you’ll need to achieve some minimum threshold as a first profit target in order for the strategy to stand on its own. Hence while the concept of “covering transaction costs” on the first contract of a multiple lot, may sound good in theory, it rarely passes the proof test when asked to perform as a stand-alone strategy.
- Trailing stops versus profit targets. My experience indicates that using profit targets is better then using trailing stops.
Trailing stops are okay as an additional exit when employed along with the profit target, but they should not be employed instead of the profit target.
Now someone is surely thinking about the old market adage “cut your losses and let the winners run.” To an extent it is true. You do need to control losses, but do not use too tight a stop. You do need to let winners run some, but make sure there is a profit target.
These views are not my subjective opinion, but the results of thousands and thousands of tests I have run on hundreds of different trading strategies.
- Trade psychology. How many times have you been in a trade and taken a profit only to see the market roar significantly further in the direction of your original position? How many times have you held on to a position for what looked like a significant move developing, only to see your nice paper profit disappear and perhaps turn into a loss?
Of course, if you have traded for any length of time you have experienced both of these situations. How do you avoid them?
One of the keys to having the discipline to stay in the game is to make peace with the fact that you simply cannot avoid them.
- Summary. We should continue to give high billing to exits in the quest to be better traders. Entries are what we might do or could do, but exits are what we have to do. Many entry techniques can work very well with just the basic exit techniques I have described herein.
Most important of all however is to remember the three rules of exits. If you can stick by these rules, while the market is doing its best to get you to break them, then you are a big leg up on the ladder of successful trading.
Corn closed the week $.04 1/4 higher. Last week, private exporters did not announce any private sales.
In the weekly export sales report, old corn sales were only 4.2 million bushels, below the 5 mb needed each week to reach the USDA export forecast of 750 mb. New crop sales were only 2.1 mb.
Last week, the crop progress report came in at 91 percent nationwide, versus trade expectations for 90 to 95 percent and a five-year average of 95 percent.
Corn was 74 percent emerged versus an 82 percent average. Corn conditions were rated 63 percent good-to-excellent, and 7 percent poor-to-very poor, while the trade was expecting 60 to 65 percent g/e excellent. The five-year average is 68 percent.
Plantings in Texas is 95 percent and Missouri is 83 percent complete, with key growing states of Iowa at 85 percent, Indiana 86 percent, Illinois 89 percent and Nebraska at 96 percent complete.
Corn is finding mild support from wet and cool weather forecasts that are limiting the last of the corn seedings and slowing emergence. Corn is close to resistance of the March and April highs.
A close above these highs would be technically bullish for the market and attractive to fund buyers. If the stock market has topped and funds begin to liquidate their holdings, look for the grains to attract some of the fund money. Normal weather will push corn prices lower as a huge crop will be realized.
Seasonal highs are normally in by June 23.
Strategy and outlook: Producers are now 100 percent of 2012/13 crop and are also 50 percent sold of the 2013/14 crop.
They re-owned 50 percent of the 2012/13 corn crop with July calls. Producers own December corn puts on 50 percent of 2013 production.
Soybeans closed the week $.18 1/4 higher from last week. Last week, private exporters did not report any private sales.
In the weekly export sales report, old crop soybean sales were 1.8 mb, above the 0.4 mb needed each week to reach the USDA forecast of 1.35 billion bushels.
New sales were strong at 21.3 mb.
Crop progress for soybeans came in at 57 percent planted nationwide, versus trade expectations for 50 to 56 percent and a five-year average of 74 percent.
They came in at 31 percent emerged versus a 49 percent average.
Iowa is 40 percent planted with Nebraska 63 percent, Minnesota 42 percent, Illinois 40 percent and Indiana at 60 percent planted.
Soybean emergence is also slow with the report only showing 14 percent emergence. The soybean crop will need sunshine and warmer temperatures.
There is talk of soybean acres being switched from corn, which would add to the bearish new crop profile if a large U.S. soybean crop is raised.
The soybean meal market has turned decidedly bearish and is the leader of the soy complex.
Normal weather will push prices lower as a huge crop will be realized. Seasonal highs are normally in by June 23.
Strategy and outlook: Producers are 100 percent sold of the 2012/13 production and are 40 percent sold of 2013/14. Sell 10 percent at $13.45 against the January contract.
Producers re-owned 50 percent of 2012/13 production with July soybean calls.
Producers own November puts on 50 percent of 2013 production.
Brian Hoops is president and senior market analyst of Midwest Market Solutions Inc. Midwest Market Solutions is a full-service commodity brokerage and marketing advisory service, clearing through R.J. O’Brien. He can be contacted at 605-660-1155.
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