2008-10-12: Run your winners, cut out the losers
There’s an old trading adage saying that "Markets will do anything and everything to frustrate the largest amount of traders." This may seem unpleasantly relevant this year.

Many a trader has no difficulty in finding an opportunity to entry, but what happens after you have entered a trade? In addition to identifying trading opportunities in order to enter the market, a trading strategy should have efficient ways of capturing profits and limiting losses when necessary. This is even more important in markets with prices moving up and down.

Many successful traders tell that they usually have more losing trades than winning trades during a year. Then why are they successful? The answer to this question is good money management. On the balance sheet, a few bigger winning trades will more than make up for the more many smaller losers.
It is critical to have good timing in trading. Problems arise when trying to control your feelings once you are in position. It is of vital importance to have a plan, or set rules when you want to get out of your trades.
All strategies need to have two ways to exit your positon ; one that would capture profits and one that would limit losses.

There are different techniques for making exits. An exit strategy may be demanding and is the most difficult part of a trading system. Signals can be a simple exit instruction, or they can be complex strategies that include multiple entry and exit techniques. A trading strategy should have a method of entering the market, a method of exiting the market while capturing profits and a method of exiting the market in order to minimize losses.

A good exit strategy should control losses sternly, but it must not sacrifice too many potentially profitable trades in the process and must allow profitable trades to fully mature. The exit strategy is important. If you can control your risk by quickly bailing from losing trades and without cutting short too many winners, you may even be able to turn a losing system into a profitable one. A solid exit strategy can make a profitable system even more profitable while reducing equity volatility and drawdown. Most important, during those predestined rocky periods, a good exit strategy that incorporates sound money management and capital protection techniques can enhance the probability that you will be around for the next money-making trade.

Money management is often implemented using stop-loss orders. This part of your exit strategy tells you how and when to get out of a trade gone wrong so that you can avoid a significant wearing down of trading capital. Another part of a good exit strategy is to ride a profitable trade to full maturity. As mentioned above, your exit strategy must not only tell you when to get out with a loss, but also when and where to get out with a profit. If a trade goes your way, you want to ride it as long as you can. Some systems allow for multiple re-entries to get you back in on persistent ongoing trends. If you can ride a strong trend to maturity, the extensive profits can more than make up for any small losses that may occur.

The profit-taking exits are often implemented with trailing stops, profit targets and time- or volatility triggered market orders. A volatility exit is intended to identify abnormal price fluctuations. If you see the market doing something that suggests that your risk is rapidly rising, it is sensible to close out your positions and limit your exposure. A complete exit strategy makes coordinated use of a variety of exit types to achieve the goals of effective money management and profit taking.

There are many different types of exits available when forming an exit strategy. One is that of money management stop orders. If a trade moves against you by more than a specified amount you would be stopped out of your position with a limited loss. There is the profit target exit, where the exit is taken as soon as the market moves a specified amount in our favour. The time-based exit closes out a trade after a specific number of days regardless of profitability. A trailing exit moves up and down along with the market to lock in some of your profits should the market change direction. If the market turns against you, your trailing stop would be hit and your trade closed out with part of your profit intact. This is usually implemented with a stop order.

Every exit strategy must embrace a money management exit. This implements using a stop order. Such a stop gets you out of a trade at a precise amount if the market moves against you. A stop order should be valid for the whole duration of the trade. Its purpose is to control the risk you are willing to endure.

Trailing stops and money management stops work well together. Often, traders will use both, starting with a money management stop and then let the stop convert itself into a trailing stop when the market let profits develop.

A profit target exit is usually implemented with a limit order to get you out of a trade when the market moves in your favour. This way you can collect quick profits. There are pros and cons using a profit target exit. On one side you can achieve a high percentage of winning trades. On the other hand this strategy may cause a premature exit giving you only small profits.

The success of any trading strategy depends on how the trader handles the exit than how he makes his entry. An option is naturally to consider trading a variety of strategies, making use of different exit logics developed to work in different market modes. This may help you to diverse risk and to smooth out your equity curve.