Cut your losses short and let your profits run. This is the essence of your trade exit rules.

Cutting losses short

A protective stop protects your trading capital, it is your initial trade risk. Before a trade is even entered your should know where your protective stop will be – this is your maximum loss (barring any slippage on the exit). There are many different ways to determine a protective stop on a trade:

Set dollar amount – Say $500 on every trade

Percentage retracement – Say 10% from the entry price

Volatility – A percentage of the average true range of the previous x bars

Moving Averages – the opposite of the moving average entry

Channel breakouts – the opposite of the channel breakout entry

Based on areas of support and resistance stops

Time – If a position is not in profit after a certain length of time then it is exited.

Letting profits run

An effective exit technique is also required to allow a successful trade to make the most profit possible and give back the least amount of it.

Usually a trailing stop is employed to achieve this objective. A trailing stop moves to lock in profits as the trade moves in the traders favour, it should never be moved backwards. There are many different ways to calculate a trailing stop:

Volatility – the stop is calculated as a percentage of the average true range of x periods.

Dollar – A set amount determined before the trade is entered.

channel breakout – exit a long position at the low of the last x bars.

moving average

chart patterns – ie move the trailing stop behind each consolidation as it forms.

Other forms of exit are:

Time Stops – A trade is exited after a certain length of time no mater what. A day trader, for example, will always exit at the market close.

Targets – A limit order is placed to exit a position at a pre-defined profit objective. However this tends to break the rule of letting profits run and usually reduces the profitability of a system by cutting short the best trades.

Tim Wreford runs Online Futures Trading, a website that provides information and resources for traders. Tim also provides a free day trading system, the results of which are updated daily on the site.