Day Trading Quick Tip # 4 - Know Your Exit Before You Enter

A complete trade requires both an entry and an exit. This seems obvious, but based upon the number of traders that enter trades without any idea of where their exit will be, this needs further discussion.

Profitable Traders Know the Future

Profitable traders know where and/or when they will exit their trades, before they even enter their trades. Their exit might be based upon a specific target (e.g. 15 ticks, 20 points, etc.), or it might be based upon a price or indicator signal (i.e. a pattern on a chart), or an amount of time (e.g. 20 minutes, 1 week, etc.). Whatever their exit is based upon, it is always known in advance.

Some traders have only one possible exit (two if you include their stop loss), and they will stick to their exit(s) regardless of what happens. Some traders have several potential exits (e.g. a specific target, a stop loss, an indicator pattern, and a length of time), and they will use whichever exit comes first. Other traders will have a preferred exit, but will change their exit based upon how the trade develops.

Why Do You Need an Exit?

Traders who enter trades without a predefined exit believe that they will know when to exit when the time comes. However, these traders will always find a reason to stay in their trades. If they are in a profitable trade, the reason will be that the trade could go further into profit and make more money. If they are in a losing trade, the reason will be that the trade might come back into profit or at least to break even. In reality, these traders are trading with the one guaranteed exit. When their trade has lost so much money that their account no longer covers the required margin, their brokerage will exit their trade for them at a very large loss.

If the possibility (read as probability) of blowing up your account has still not convinced you, try this. If you are a trader that trades without knowing your exits in advance, consider which other traders are trading like you. The largest group of traders that trade without predefined exits are the herd. Enough said?