Greatest Hits: Exit Ideas

Wednesday, May 28, 2008 at 08:42AM

My internet connection is ridiculously slow. Therefore I am going to post one of my "Greatest Hits" for the next few days while I am on vacation. The market hasn't provided enough volatility to daytrade, so I am keeping stops on the few positions I have and going to go swim with the dolphins today. See you on Monday.

Trading is unlike any other profession in the world. You wake up every morning to trade against the best of the best. In what other profession are you going up against individuals that in all honesty, are at a totally different skill set than you are?

Jack Schwager said it best...

"Trading provides one of the last great frontiers of opportunity in our economy. It is one of the very few ways in which an individual can start with a relatively small bankroll and actually become a multimillionaire."

"Of course, only a handful of individuals succeed in turning this feat, but at least the opportunity exists."

Face it, we are amateurs at this sport. I have been trading for a decade and still feel I have a lot to learn. I look at the competition out there, and there are individuals out there who could trade circles around me. How does that make me feel? It motivates me.

I hope by now that I have been able to teach you that profits exist in the market, but they are also easily lost if you are not careful. While being so young in your investing careers, the biggest advantage you have against the market is... managing your risk and creating a trading style/system. I want to quickly touch on them both.

A traders only hope of making it big is by focusing on risk first, reward second. If you find your account consistently fluctuating in double digit percentages, you are not properly position sized or diversified. If you are white knuckled during market hours, you are not properly position sized. If at any point you are wondering if you are not properly position sized, you are not properly position sized.

Trade small, don't be a hero. Plan on doing whatever is necessary to be here to trade again tomorrow. If you are on a bad streak, step away! If it seems that you are always on a bad streak, maybe it's not the market.... maybe it's not the stock... maybe it's your system!

"(So you didn't have a clear exit point) In other words, the only way you could stop trading was by losing." ~ Ed Seykota

I have generated a lot of profitable trading ideas on this blog, and others have contributed great ideas here as well. What is troublesome is to hear the comments about how one of these ideas has given someone the greatest trade they have ever had, and yet the next comment is how someone has taken their biggest loss on the same trade. Where does the inconsistency lie? Trading style.

It's easy to take a trade without a plan just to get in. Like Ed said, these usually end up as a loss since you never identified when to get out. If you fall into this profile, you need to take action immediately.

I want to review a simple concept first, then ideally follow up with a video about this later. Ask yourself, are you a trend trader or a swing trader? If you are drawing a blank, allow me to illustrate.

FIG 1. Swing trade on KIM

Here is a chart on KIM. I mentioned shorting this shortly before it broke support. For those that entered the trade, what were you looking to accomplish? For the most part, you will not be able to always accurately predict a top or bottom of a trend. Here is an example of why you might just aim for a quick move in the stock, versus trading with the trend.

Figure 1 shows a great move in the stock, and how profits can be captured by reasonable entries and exits based on support and resistance. I watched a lot of traders start off with great profits in this stock (stock lost about 10% in 2 weeks) then watched those profits dissipate as the stock rallied back towards old resistance.

I talk about this specific event in a trade as the difference between the trend trader and the swing trader. Forget all that for a moment, what are your thoughts? How do you like being up triple digits on your option, then feeling obligated to give it all back knowing that the stock is going right back up to where it came from?

FIG 2: Uhhh...why did I let this happen?

You have probably heard me discuss this same topic many times on the blog, and heard me tell you how I trade it. I hold on during this re-test, but I wind up with a few more losing trades than the swing trader. However, in the long run, I wind up with bigger profits. That's the incentive to trade with the trend. If you are more emotional than the next trader, or uncomfortable with having more losses than the swing trader, why do you allow yourself to go through it?

Decide on the path of least resistance. In many cases I find that individuals are trying to mix and match both strategies, or are trading a strategy that doesn't fit them very well. Remember that in trading, no system is one-size-fits-all.

Fig 3: Various exit strategies

Having the right trading system, exit strategy, position size is the difference between a winning or losing system. I hope we can open a good dialogue on the topic. I have written about this numerous times in my archives, but another post was due. Especially now that we are seeing some turbulence in the market.

That's it. I am done rambling. I am going to bed. See you tomorrow.

Recommendation: That was way too long to hold your attention, wasn't it?

Long: Post

Short: KIM

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