An Excerpt from the Timely Trades Letter.
When I am trading I know exactly how I am going to exit the position before I ever enter it. Entering a position without a clear exit strategy usually ends up trading on emotions or hunches. Trading on emotions or hunches often leads to losses. Mary your spouse for life, but just date stocks. Always have an exit strategy. Always.
The current market conditions play a key role in determining exit strategies. Stocks behave differently in trading range markets than they do in trending markets. Since a key part of trading is adapting to the market (it will not adapt to you, you must adapt to it) traders exit strategies should change with the market conditions.
The market is the summation of a large number of individual stocks. In trading range markets most stocks tend to ‘pop and drop’ rather than show strong trends. When the market is in a trading range then almost by definition most stocks cannot be trending. If they were then the market, which is the sum of all those trending stocks, would also have to be trending. When the market is in a trading range it tells you that the typical stock is not going to run far before it retraces. Traders use this market information to realize that in trading range markets they need to focus on shorter holding times and quick profits. IN trading ranges traders are trying to piece together a trend in their account from the brief pops in several different stocks rather than trying to catch the rare single stock that is trending. Traders pick up the initial move on a stock that triggers, close it then pick up another pop and keep trying to repeat the process. Looking for stocks that run far in a trading range is likely to just be frustrating, adapt to what the market is showing you. If you use the same approach in all market conditions you are likely to get a lot of practice exercising stops.
When the market is trending stocks tend to run longer because they have the wind behind their backs. The market is the sum of a large number of stocks. To make a trend out of a large number of stocks many of them need to be running for more than just a few days. Once again, it is the observation of the market conditions that tell traders how to trade. Traders do not trade a new shiny system just be cause they have it. The trade a system because testing indicates it is appropriate for the current market conditions and then they use the market conditions to determine the most appropriate exit strategy.
Eventually almost all resistance areas are broken, but if the stock usually retraces at resistance I want to go with the odds, and be positioned to profit if the stock does the normal thing and retraces. If it does retrace I have my profits and can use them in a new trade. If the stock breaks above resistance I still have my profits and can still take another trade. From a risk management standpoint I am better off to have taken the profits. I do not worry about what a stock does after I am out, I am off to the next trade. I am always trying to position myself if the market and my positions do the normal thing. When something unusual happens I may loose a few bucks, but by definition unusual things do not happen often. One of the keys to trading is learning what usually happens in a given situation and then being positioned to profit if it does.
In a trending market I will allow the position more room to run and will actively manage the exit. This approach comes from testing a number of trading systems in different market conditions and seeing how holding times effect the results. When the market is trending I will still look to close positions when either the market or my position approaches resistance. If the position is not close to resistance then I watch the volume pattern. If it is going up on generally large volume and down on generally small volume I will give it some room. I look for trend lines to use to manage the exit. I look for signs of distribution in the position to indicate that it may be best to exit and move on to another position. The basic rule is that if there is not a clear reason to hold the exit and move into another position that does have a clear position to be holding.
Steve Palmquist a full time trader who invests his own money in the market every day. He has shared trading techniques and systems at seminars across the country; presented at the Traders Expo, and published articles in Stocks & Commodities, Traders-Journal, The Opening Bell, and Working Money. Steve is the author of, “Money-Making Candlestick Patterns, Backtested for Proven Results’, in which he shares backtesting research on popular candlestick patterns and shows what actually works, and what does not. Steve is the publisher of the, ‘Timely Trades Letter’ in which he shares his market analysis and specific trading setups for stocks and ETFs. To receive a sample of the ‘Timely Trades Letter’ send an email to sample@daisydogger.com. Steve’s website:www.daisydogger.com provides additional trading information and market adaptive trading techniques. Steve teaches a weekly web seminar on specific trading techniques and market analysis through Power Trader Tools.
The current market conditions play a key role in determining exit strategies. Stocks behave differently in trading range markets than they do in trending markets. Since a key part of trading is adapting to the market (it will not adapt to you, you must adapt to it) traders exit strategies should change with the market conditions.
The market is the summation of a large number of individual stocks. In trading range markets most stocks tend to ‘pop and drop’ rather than show strong trends. When the market is in a trading range then almost by definition most stocks cannot be trending. If they were then the market, which is the sum of all those trending stocks, would also have to be trending. When the market is in a trading range it tells you that the typical stock is not going to run far before it retraces. Traders use this market information to realize that in trading range markets they need to focus on shorter holding times and quick profits. IN trading ranges traders are trying to piece together a trend in their account from the brief pops in several different stocks rather than trying to catch the rare single stock that is trending. Traders pick up the initial move on a stock that triggers, close it then pick up another pop and keep trying to repeat the process. Looking for stocks that run far in a trading range is likely to just be frustrating, adapt to what the market is showing you. If you use the same approach in all market conditions you are likely to get a lot of practice exercising stops.
When the market is trending stocks tend to run longer because they have the wind behind their backs. The market is the sum of a large number of stocks. To make a trend out of a large number of stocks many of them need to be running for more than just a few days. Once again, it is the observation of the market conditions that tell traders how to trade. Traders do not trade a new shiny system just be cause they have it. The trade a system because testing indicates it is appropriate for the current market conditions and then they use the market conditions to determine the most appropriate exit strategy.
Eventually almost all resistance areas are broken, but if the stock usually retraces at resistance I want to go with the odds, and be positioned to profit if the stock does the normal thing and retraces. If it does retrace I have my profits and can use them in a new trade. If the stock breaks above resistance I still have my profits and can still take another trade. From a risk management standpoint I am better off to have taken the profits. I do not worry about what a stock does after I am out, I am off to the next trade. I am always trying to position myself if the market and my positions do the normal thing. When something unusual happens I may loose a few bucks, but by definition unusual things do not happen often. One of the keys to trading is learning what usually happens in a given situation and then being positioned to profit if it does.
In a trending market I will allow the position more room to run and will actively manage the exit. This approach comes from testing a number of trading systems in different market conditions and seeing how holding times effect the results. When the market is trending I will still look to close positions when either the market or my position approaches resistance. If the position is not close to resistance then I watch the volume pattern. If it is going up on generally large volume and down on generally small volume I will give it some room. I look for trend lines to use to manage the exit. I look for signs of distribution in the position to indicate that it may be best to exit and move on to another position. The basic rule is that if there is not a clear reason to hold the exit and move into another position that does have a clear position to be holding.
Steve Palmquist a full time trader who invests his own money in the market every day. He has shared trading techniques and systems at seminars across the country; presented at the Traders Expo, and published articles in Stocks & Commodities, Traders-Journal, The Opening Bell, and Working Money. Steve is the author of, “Money-Making Candlestick Patterns, Backtested for Proven Results’, in which he shares backtesting research on popular candlestick patterns and shows what actually works, and what does not. Steve is the publisher of the, ‘Timely Trades Letter’ in which he shares his market analysis and specific trading setups for stocks and ETFs. To receive a sample of the ‘Timely Trades Letter’ send an email to sample@daisydogger.com. Steve’s website:www.daisydogger.com provides additional trading information and market adaptive trading techniques. Steve teaches a weekly web seminar on specific trading techniques and market analysis through Power Trader Tools.
