A critical moment in trading When is the time to exit a trade

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A Guide To Exiting Trades Successfully

How many times have you been in a trade that goes in your favor a decent amount of pips and then it starts moving against you and you start to feel panicked? What about being in a trade that is up a nice profit and you decide to close it out only to see the market continue moving two or three times further in your favor without you on board? Is this just “part” of trading or are there things you can do to limit these types of frustrating trading situations? Today’s lesson is going to explain how you can make exiting your trades as simple and unemotional as possible.

Exiting trades is hard for most traders, but it doesn’t have to be. Like most other aspects of trading, people tend to over-complicate their exits and make them a lot more difficult than they need to be. It is the exiting of a trade that truly does separate the winners from the losers in the trading world. There are some very talented market analysts out there who can pick the market direction with 80% accuracy but still cannot turn a consistent profit because they are terrible at exiting the market.

Change the way you think about trade exits

When you think about “exiting a trade”, the first thing that comes to your mind is probably not a stop loss getting a hit for a pre-calculated loss that you knew had about a 40 to 60% potential of taking place. Instead, you probably think more about “rewards” and “take profit levels” when you think about exiting a trade, at least this is what most traders tend to think about it.

It’s pretty normal to think this way, because after all, most of us are initially drawn to trading from the idea of “fast money” or “quick profits” and “rewards”…and so it takes more brain power and forward-thinking to force yourself to think about losses and stop losses getting hit as an equally important part of exiting trades. So, don’t think you are alone if you have a fixation on profits and rewards…just know that you will need to “shift” your mentality on exiting trades if you want to have a chance at making consistent money in the market.

An important fact to understand about exits is that an “exit” includes profit targets AND STOP LOSSES, and an exit can also be a breakeven exit. Thus, it’s important to start thinking about stop losses as a critical component to your overall trade exit strategy, because how you manage losses and risk will decide whether or not you make consistent money in the market.

Accept that you simply aren’t going to win some trades

I’m going to tell you something right now that will have a profound effect on the rest of your trading career IF you decide to believe it and build it into your trading and money management plan: YOU ARE GOING TO HAVE LOSING TRADES. Whether or not you want to accept this fact is up to you. But, if I can promise you one thing about trading, it’s that you WILL have losing trades. How you manage your losing trades is a critically important factor in determining whether or not you make money in the market.

If you feel like you have already mastered your trading strategy and you have patience to wait for it to provide you with high-probability entry signals (you aren’t over-trading), the only other way you can consistently lose money in the market is by mismanaging your exits.

Here’s the “behind the scenes” reason why so many traders find exiting trades difficult or otherwise mismanage their trade exits; they are risking too much money per trade .

Think about it; if you have over-leveraged your account on a trade and it goes into profit for you, you’re going to have a very hard time taking that profit because relative to your account size you have a large open profit and as you sit there looking at that large open profit all you can think about is how much more you “could” make. You begin to justify reasons of why the market “might” keep moving in your favor and start “counting your chips at the table” by calculating how much more profit you could make on the trade if it keeps moving in your favor.

Of course…you are probably all too familiar with how the story ends…you don’t take the open profit for the reason I just described, and the trade starts moving against you and you are almost paralyzed in disbelief at how fast all your profit is vanishing. Your thoughts then move to the idea that “maybe” the market will stop moving against you and turn back around in your favor. You are now on the “roller coaster” of emotional trading that will eventually end in you losing a large amount of money…all because you risked too much on the trade.

Simple solution: ACCEPT that you aren’t going to win every trade and act accordingly. “Accordingly” means that you never risk more than you are OK with losing on any one trade, because, like it or not you COULD lose on any trade you take, not matter how “sure” you feel about it.

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You need to be flexible but not emotional with your exits

As traders, we have to constantly ask ourselves whether our next decision in the market is a purely emotional one or one supported by logic and by what the price action is actually showing us on the chart.

Perhaps one of the most common mistakes that traders make in exiting their trades is moving their initial target further away ONLY because they think the trade will keep going in their favor. Most of the time, doing this leads to a smaller profit than what you had originally planned, or no profit at all.

Note: Just to be clear, I am NOT saying that you should never move your target further out from your entry or that you should never intervene and close your trades out manually, because if there’s a price action-based / objective reason to do so, then you should. The question you have to answer about profit targets is are you moving your targets around or exiting manually based on emotion (greed or fear), or is it based on what the actual price action is doing on the chart?

Remember, when you originally plan your exit for the trade, you place the profit target based on your mindset and analysis of the market just before you entered. You were probably a lot more objective and calm at that time because you weren’t in the market yet. Once your trade gets filled you immediately become less objective and more emotional as the market ebbs and flows. The best course of action in regards to profit targets, is often just to leave it where you initially planned it. Moving it further out as price approaches it is typically an action born out of greed…not out of logic. How many times have you done this and then the market hits your initial planned target or moves just a tiny bit past it and then rockets back against you, turning a solid open profit into a much smaller one or even a loss?

Even if the market DOES keep going in your favor after you moved your target further out, it’s still a bad habit to develop because it means you are reacting emotionally to what the market is doing rather than preempting your actions in the market and acting objectively. You cannot rely on luck in trading, eventually your luck will run out, probably when you need it the most. Thus, essentially what I’m saying here is that you need to stop moving your profit targets away only because the market is getting close to hitting them. Let them get hit if there’s no price action based reason not to move them; let your pre-planned profit target play out, then patiently wait for the next trade. This is part of developing discipline, patience and the correct trading habits.

You also need to be flexible but not emotional with your stop losses. You can be a little bit more rigid with stop losses than with profit targets. Meaning, with stop losses, it makes more sense to let the market take you out by moving down or up into your stop loss, that way you give the trade the maximum possible chance of moving in your favor.

The “set and forget” trade management concept that I teach is more important in regard to stop losses than profit targets. We need to avoid exiting a trade just because it’s going against us; we need to be much more disciplined with the set and forget concept by not exiting until our stop loss is hit in most cases.

If you manually close a trade out for a loss before it hits your pre-determined 1R dollar loss, you are also voluntarily eliminating any chance of the trade moving in your favor and this obviously affects the potential long-term profitability of your trading strategy. This is OK to do sometimes, IF the market’s price action calls for it, but a lot of times traders close out trades for small losses ONLY because the market moves against them a little bit, then the market moves back in their favor without them on board. As with profit targets, you really should only move a stop loss or close a trade out manually for a loss if there’s a valid price action based reason to do so.

Note: You should NEVER move your stop loss further away from your entry point, no matter what. This is like the cardinal sin of trading and it’s a fast track to blowing out your account . Stop losses should only ever be moved to reduce your risk on the trade, to breakeven or to lock in profit by trailing the stop.

Sometimes, taking a smaller profit is OK…

This point goes along with what we just discussed about being flexible in your trade exits. But, I wanted to mention this more in-depth since I know there are some misconceptions out there about taking less than a 1:2 risk reward and when / if that’s “OK”.

Basically, you don’t need to be totally “rigid” by always either taking a 1:2 or 1:3 risk reward (or some other pre-set reward) or no reward at all. Sometimes, it does make sense to close a trade out with a smaller profit if there’s price action telling you to do so…even if you haven’t reached a 2R or more profit.

I get emails from traders saying things like, “Nial, my trade came 5 pips shy of a 1:2 profit today but I didn’t take it and it turned around and now is at a loss”…this is where you need to monitor your trades and intervene if you have to. If the market gets really close to your profit target you should monitor the price action, if you are at a 1:1.5 or 1:1.8 risk reward and the market appears to be turning around (based on the price action)…there’s nothing wrong with closing the trade out and taking the profit off the table. You don’t need to let profits slip away just because you are trying to get some exact profit target, that’s also being greedy…situations like these is where the saying “don’t be a dick for a tick” came from.

You want to keep an eye out for a price action signal that is opposing your initial trade or for situations where the market spends a long time trying to touch a level but can’t quite get the legs to hit it. If you notice either of these things happening it probably means you need to intervene and possibly exit the trade early.

Set and Forget truly is powerful, use it with discretion though.

Many of you have probably already read my ‘set and forget trading’ article that talks about a very simple trade management technique which, as the name implies, involves setting and forgetting your trades. In other words, after you enter your trades you don’t meddle with them. However, there are exceptions to this rule, because the markets are dynamic and constantly changing…so we cannot afford to be 100% rigid in our approach to trading.

It will help if you think of “set and forget” as more of a “default” trade management technique…not something you do all the time despite what the market is telling you. Set and forget basically just means you don’t do anything if there’s nothing logical to do. It should be your baseline trade management point…meaning, after you enter a trade you don’t move your stops or targets around unless the price action that you see on the chart is implying that you should. You should consider “set and forget” as a nice metaphor for managing your trades with logic and objectivity instead of emotions like fear and greed.

Thus, the mental concept of “set and forget” is important, but the actual practical implementation of it will still require some monitoring and intervention. You will need to monitor your trades say once every 4 to 8 hours on average, and at the time you need to be as objective as possible as you observe the market. If a trade is working as planned, then do nothing. If the market has formed a huge pin bar reversal against your position but you are still up about two times your risk…then it probably makes sense to close that trade out manually and take the profit, because you have a valid price action-based reason to do so.

However, let’s say you check in on your trade and it’s gone against you by 20 pips but there’s no obvious price action telling you to exit. You would not close the trade at that point, you would instead leave it open and just let the market play out. Closing a trade only because it has gone against you a little bit is not a good enough reason to close it out…we need to give our “edge” (trading strategy) time to play out if there’s no logic / price action-based reason to close it out.

What is a “successful” trade exit?

Finally, you can determine whether or not you exited a trade successfully by answering the following questions:

1) Did I exit emotionally or logically? (“Logically” should be the answer)

2) If I lost on the trade, did I lose my predetermined dollar risk amount (1R) or less? (“Yes” should be the answer)

3) If I won on the trade, did I make 2R or more on the trade? If I made less than 2R on the trade is there a logic and price action-based reason that I exited before 2R was hit or did I just panic because the trade was moving against me? (“Yes” you should have exited logically no matter the size of your profit)

If you want to learn more about learning to read the market’s price action to help you exit trades simply and successfully, checkout my trading course and members’ community.

The Best Times of the Day to Buy and Sell Stocks

The Balance 2020 / Miguel Co

Sometimes less is more when it comes to day-trading. Devoting two to three hours a day is often better for most traders of stocks, stock index futures, and index-based exchange-traded funds (ETFs) than buying and selling stocks the entire day, for a couple of reasons.

Specific hours provide the greatest opportunity for day-trading, so trading only during these hours can help you maximize your efficiency. Trading all day takes up more time than necessary for very little additional reward. In many cases, even professional day traders tend to lose money outside of these ideal trading hours.

Avoiding Mental Fatigue

Additionally, day-trading requires discipline and focus, both of which are like muscles. Overwork them and the muscles give out. Trading only two to three hours a day keeps you on your game, and it likely won’t lead to the mental fatigue that can negatively affect your work. Trying to trade six or seven hours a day can drain you and make you more susceptible to mistakes.

Of course, everyone has different focus and discipline levels. Some traders might be able to buy and sell all day and do it well, but most do better by trading only during the few hours that are best for day-trading.

Trading at the Opening

Trading during the first one to two hours that the stock market is open on any day is all many traders need. The first hour tends to be the most volatile, providing the most opportunity. Although it sounds harsh, professional traders know that a lot of “dumb money” is flowing at this time.

Dumb money is the phenomenon of people making transactions based on what they read in the newspapers or saw on TV the night before. The information these people are acting upon is typically old news. Their trades can create sharp price movements in one direction. Then professional traders take advantage of the overly high or low price and push it back the other way.

New day traders are often told not to trade during the first 15 minutes of the day, and that might be good advice for very new traders, but the first 15 minutes typically offers the best opportunities for seasoned traders. This time period can provide the biggest trades of the day on the initial trends.

Ending by 11:30

Regular trading begins at 9:30 a.m. ET, so the hour ending at 10:30 a.m. ET is often the best trading time of the day. It offers the biggest moves in the shortest amount of time. If you want another hour of trading, you can extend your session to 11:30 a.m. ET.

A lot of professional day traders stop trading around 11:30 because that’s when volatility and volume tend to taper off. Trades take longer, and moves are smaller on lower volume—not a good combination for day-trading.

If you’re day-trading index futures such as the E-mini S&P 500 (ES) or an index-based ETF such as the SPDR S&P 500 (SPY), you can begin trading as early as 8:30 a.m. during premarket hours and begin tapering off at around 10:30 a.m. That provides a solid two hours of trading, usually with a lot of profit potential.

As with stocks, trading can continue up to 11:30 a.m. ET, but only if the market is still providing opportunities to capitalize on the trading strategies you’re using.

The Last Hour

Many day-traders also trade the last hour of the day, from 3 to 4 p.m. ET. By that time, traders have had a long break since the morning session, allowing them to regroup and regain their focus.

The last hour can be a lot like the first when you’re looking at common intraday stock market patterns. It’s full of bigger moves and sharp reversals. Like the first hour, many amateur traders jump in during the last hour, buying or selling based on what has happened so far that day. Dumb money is once again floating around, although not as much as it was in the morning. It’s ready to be scooped up by more experienced money managers and day traders.

The last several minutes of trading can be particularly active, with big moves on high volume.

The Best Days and Months

Keep the bigger picture in mind, too, beyond the hourly grind. Monday afternoon is usually a good time to buy because the market historically tends to drop at the beginning of the week, particularly around the middle of the month. Many experts recommend selling on Friday before that Monday dip occurs, particularly if that Friday is the first day of a new month or when it precedes a three-day weekend.

Likewise, prices tend to drop in September and then hike again a month later. October is generally positive overall, and prices often go up again in January, particularly for value and small-cap stocks.

Reversal Trading: 5 Practical Entry Strategies

Am I entering too early?

Is this a good enough signal to enter this trade?

If you’ve been trading for more than a week, you’ve probably asked yourself these questions multiple times. How do you accurately determine when to enter? While things like trade management, exit strategies and discipline are also big contributing factors towards your performance, picking a good entry point will increase your chances of having a winning trade on your hands.

I mostly trade reversal setups and entries are critical here. If you’re entering too early, you might enter exactly at the worst point, when the trend has retraced and now continues in the original direction. On the other hand, if you enter too late, you’re missing the bulk of the move and a good risk:reward trade is less likely. Picking a good entry point is something that is learnt with experience, but there are entry strategies that make it easier.

I’d like to share with you some of these strategies to enter trades and why they’re important. These are the same strategies I use in my own trading and the same strategies I explain to our trade advisor members. Let’s get started!

1. Lower Low and Higher High

The first entry strategy is a classical chart analysis technique: trends feature higher lows and higher highs in an uptrend and lower lows and lower highs in a downtrend. So what happens if you get a lower low in an uptrend or a higher high in a downtrend? Right, there’s a high likelihood of a reversal happening and you should look for entries.

Take the example below: we have an uptrend and when you look at the low swings, we keep on seeing higher lows (HL). At some point, the distance between those HL’s gets smaller and smaller until finally, we get a lower low (LL)! The low of the last higher low is broken when the candle closes below that level. Entering a short trade at this point would’ve been a good way to get a high reward-to-risk trade work out in your favour.

Of course, it also works in the opposite way. In the chart below, we see a downtrend and when you look at the highs of this downtrend, there’s a succession of lower highs (LH). At some point, however, we see a shift in direction and one swing high just about touches the previous LH. A little bit later, we see a clear break of the last LH and again, this would’ve been the perfect moment to enter a long trade and profit from this reversal setup.

As you can see, basic price action analysis can already help you very much when we have to deal with spotting reversal entries. Clearly marking the highs and lows of a trend is a good way to train your chart reading skills and a clear break of these levels in the opposite direction often indicates a good reversal entry point.

2. Break of a Local Level

As an extension of the previous concept of highs and lows, we are now going to look at how you can trade the break of a level. For the purpose of this article, a level means an area where the price has previously seen multiple reactions. Support and resistance, but also supply and demand can act as levels. The most significant levels are the ones that have been tested both from below and above. Finally, levels don’t always have to be just one price, but can rather often be a zone in which the price is more likely to react.

The price will commonly react at these levels, often in the form of a bounce or a move in the opposite direction. In this case, we say that the level holds. Occasionally, however, these levels will break and this again can become a good opportunity to enter a reversal trade.

Let’s look at the example below. First, the price finds support at arrow 1. That support gets broken and it gets retested from below at arrow 2. Interesting! It seems this price area functions as a level and local resistance, so we will watch this level for a break to the upside. We can see at arrow 3 that the local resistance gets tested and initially holds, but eventually gets broken at 4. As you can see, this was a good moment to go long and make a nice profit.

In this next example, we can see that a level is first tested twice as resistance. The price breaks through the level and then tests it multiple times as local support. From this moment, we want to be looking for a break of this local support. Once it did break, we could see a smooth way down as the price sold off.

3. Momentum

Momentum is one of the more important indicators that the price will continue in the same direction. We speak of a momentum candle when the candle is comparably larger than the candles that precede it. Often, momentum candles will close strong, meaning that there is little to no wick when the candle closes.

In the below example, you can see how price initially contracts: small candles with a narrow range of motion. All of a sudden, we can see a bullish momentum candle: much larger than the previous candles and with a strong close. This candle also crossed the moving average and as you can see, it triggered the start of a new uptrend.

4. Pin and Drive

I’ve written about the pin and drive reversal entry pattern before, so it only makes sense that it makes it on this list as well. The pin and drive pattern combines two concepts: price rejection and momentum (see the previous strategy). The price rejection indicates that while the price level was tested, it was violently pushed down again, creating the pin (bar). Then, a momentum candle follows: a strong push in the opposite direction.

In the example below, you can see this in action. First, we can see a candle that tests the highs but gets violently pushed back down by sellers, creating the pin bar. Then, the bearish momentum candle is formed. This indicates to us that not only the price was rejected but there’s momentum to take this bearish move further down. It’s a great way to enter a reversal trade and I recommend you to read the full article on it to find out how to trade this pattern.

5. Break and Retest

Finally, we’re taking a look at the break and retest pattern. A break and retest pattern often occurs in combination with a reversal pattern. At some point, the price rolls over into a new trend (for example, by breaking a local support or resistance) but just before this happens, you see the price retesting the level it just broke. If after the retest, the price continues in the initial direction, it’s also a good signal to get in a trade.

In the example below, you can see how the price initially uses a level as resistance. When it eventually breaks through, it doesn’t immediate move further up but instead, retests that same level and only then, starts the rally. When you enter after the retest has happened and you see that the price continues back up (at the blue line), you would have a worry-free trade.

Conclusion

The concepts above are 5 examples of how you can enter on a reversal trade. There are more, but these will at least give you some inspiration to start looking for reversal setups yourself.

A really strong reversal trade will often combine multiple of these entry strategies. For example, the break of a local level and a momentum candle. The more of these concepts are present with a setup, the better the chances that the trade will eventually work out.

If you look at these setups and think “this makes sense, I want to trade like this”, consider becoming a member of my Trade Advisor program. When you join, you get my full weekly watchlist with 10-15 setups that use these concepts and you get personal coaching from me in the online chat so you can start finding these setups yourself!

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