Responding to an email about trading woes I thought to myself this would make a great piece for the blog that I could be beneficial to all of the newbie traders. #1 thought on my mind since I learned the hard way is always "I have not made profits until I've locked in profits". What do I mean by this? I mean "un"realized gains(open positions) are not really gains. Sounds as simple as can be but day traders tend to forget this very elementary trading rule.
Traders be it swing traders or day traders have established their time frame yet lack the ability to pull the trigger once they have gains on their trades. They forget their time frame or decide to leave it on for weeks to eek out a few more pennies only to see all profits disappear. Never forget the idea that time plays a role in the probabilities of success as every minute or day changes the dynamics of the trade. For you new traders you'll soon realize that there is in fact a fine line here. Taking profits too early as opposed to never taking profits. That's an issue you'll deal with forever in your trading as their simply isn't a one size fits all trade exit strategy. Your main issue here is to ensure that you maintain a risk reward that is favorable to continued profitability. If you're trading stocks you are left at something of a disadvantage as stocks aren't open all day and night. So you have to remember that once you have reached a statistical favorable profit goal you need to begin locking this stock trade gain. If you're trading futures you are at a unique advantage as you have only a small time frame in the day where you can't make a move assuming of course you aren't holding over the weekend(something I never do).
How do I do it? Well I start to sell off contracts as to protect my gains to create a no loss situation. I take a profit to cover the remaining contracts and their possible stop out. I'll leave some to run, but for the most part the trade is over for me as I wait for what I'm looking for. I look to make progress and I stay true to continuing with winning trades. I'm not looking for a home run, but rather to play the statistical favors of trading. My only job to do at that point is to make sure those few contracts don't stray from the course too much and that when I am in a favorable position I take advantage of it. Remember that the trick is to have the money working and making money almost immediately and if it's not then put it to work somewhere else or move your stop up to prevent any pull back that may give back profits. Your goal is to make your profits then rotate on to the next day trade or swing trade waiting for it to either come back down into another opportunity or not.
Just as a reference point for you guys to get an idea on my typical exits :
Always my main concern is to be aware of any MAJOR downtrend lines that may prevent the position from continuing any further. Sometimes it's a factor while others times it is not. Another factor that I always include in my exit strategy as an ultimate "no more contracts" or "stops moved all the way up to price" target is the trend line opposite to my entry(higher time frame if this is the case) as I typically tend to buy off of lower channel lines or lower support areas and vice versa. Remember though as I stated earlier that I'm releasing on the way up as sufficient profitability is present. If I don't like the idea of leaving any on I still make sure that my risk / reward is in place.
FULL RISK DISCLOSURE: Futures trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.