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Exits at break even

11/24/2010

How many times have I taken a great trade where I followed all my rules, entered, saw the thing go in my favor, moved my stop to break even, went to sleep – or to the gym or whatever, and come back only to see that I had been taken out by 3 or 4 pipis before jetting to my target area? I don’t know how many times, but once is enough to really piss me off.

Everyone has reasons for getting into a trade and we should all have great reasons for getting back out of one again. I submit, that being at break even is seldom a good reason though. Since we enter based on a trade setup that we’ve proven through time will pay out for us shouldn’t we exit for the same reason.

I think there are two good reasons for getting out of a trade. First, our take profit target has been hit. We base this on our original analysis being correct and the trade paying out. Second, something about the assumptions that we used to enter the trade have changed so we should exit. In essence, our original analysis is proven to be flawed so we should exit. This doesn’t mean we aren’t in the money, simply that things have changed. Maybe we’re below a few favorite moving averages and shorting in a trend continuation. Maybe the price breaks above those averages. Sure, we’re still in money, but we consider this a trend change. Maybe we break a declining trendline. Maybe we’ve hit a fib zone and price looks like it’s reversing (though, I have an amazing ability for exiting at the top of a small correction before seeing a few hundred more pips go in my favor – not always the best exit strategy.) I don’t use trailing stops, but I hear some people have success with them, so maybe their stop is triggered. Personally, I think this method is too arbitrary, but that’s just me.

I’m going to look at a trade I’m in. I’m short EUR/GBP from night before last, just below .8500. I entered based on the trade having just broken the 200 hr sma, and having broken the .618. I’m the first one to admit, this isn’t the best entry, but so far it’s doing alright. I’m taking this as a medium term trend continuation trade. My target is a lot farther down, I’ll see if this pair gets there, but so long as we’re below the 200 hr ma and trendlines, I’m happy with the trade.

I woke up last night to see myself in the money about 60 pips. Not bad for a daytrade, but not great for a longer term trend continuation trade. I thought about taking my $, or maybe moving break even. See that spike high, about 3 candles back? That’s break even + 3 pips. If I’d set my arbitrary stoploss at break even, simply because I was up, I would have wasted a lot of time for nothing.

Lets take a look again with new fib lines: Price is below the 55, 100, & 200 ma’s. That spike we had barely pierced the .382 of this recent move down, bounced off that first down trendline and touched the 55 ma. Now I’m up over 30 pips again. In this case, had I moved to break even, I would be kicking myself. As it is, I’m kicking myself for not adding to the trade on this bounce. (there’s always something to kick yourself for.) So, where’s a good place for my stop? Sometime after the point at which we can confirm this downtrend is no longer a down trend.

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  1. eur / gbp / usd Monday update « Kosentrade's Blog

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