At a recent trading conference several traders were talking about exit strategies at lunch and one noted that he ‘liked to hold positions for about a week’. When asked he had no reason for the decision, it just ‘felt right’ to him. Trading on tips, emotions, or what ‘just feels right’ is unlikely to produce good long term results. Trading should be based on the careful analysis and testing of each trading system that a trader uses. Testing does not eliminate risk or guarantee results, but it can help to give a good idea of how a system has actually performed.
In trading ranges I generally do not hold longer than three days. I will exit sooner if the stock approaches the upper Bollinger Band or a horizontal resistance point. I do not want to hold out for the last dime, I want to be taking profits as the stock approaches resistance. In a trading range market it is generally better to get out too early than too late. It is tough to go broke taking profits.
When I say this at trading conferences there is usually someone who says, ‘yes, but if the stock broke through resistance wouldn’t you have been better off to have held longer?’ the answer is obvious, and...
irrelevant. Trading is about managing risk not trying to squeeze every last time out of each trade. By definition the market usually retraces at resistance. If the market usually retraces from resistance then I want to be out of the position before it does and use the funds for another trade that is just triggering and starting its run.
Eventually almost all resistance areas are broken, but if the stock usually retraces 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.
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