Saturday, July 14, 2012

It's all in the exits

If you took a straw poll of say 100 relatively new or inexperienced traders, at least 90% would guess that the entries are more important than the exits. I strongly suspect that if you asked those who have been round the trading block a few times, and have been successful, they would say the opposite.

Why is this? The answer is fairly simple:
  • Exits protect your capital when you are wrong;
  • Exits also ensure you capture the bulk of your profits before price starts to reverse, eroding those profits.
A lot of unsuccessful traders have an endless fascination with entries - as if that's the secret to trading success. Of course, having entry signals that get you into a position as early as possible, maximising the potential from the trade is important, but it is not the be all and end all.

Want proof? A trader I know who is successfully trading his own system has recently tested both aspects of his system, once with completely random entries combined with his exit rules, and then with his entry rules and random exits. Now, which do you think made money and which lost money???

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