How to Exit Trades Based on Price Action?

[keymoo 10]

Hi there,

 

I am currently developing a trading plan based mostly on work done by Martin Pring on price patterns, price action. I am looking for the market to signal to me turning points, reversals using price action in confluence with other longer term price patterns and support/resistance levels.

 

Can you recommend any resources on exiting trades? I preferred style of trading is to scale in on longer term charts and then look for an all-out exit. I much prefer this over all-in and scale out as it is less risky. I have written about a potential setup on Platinum Futures here on my blog and I find it easy to get into a trade but not sure where to get out.

 

Thanks for any pointers.

 

keymoo

[brownsfan019 17]

I just told someone in an email that exits are the worst - you will always be wrong - either out too soon or out too late in hindsight.

 

As soon as you accept that you will never got out at the high or low of a move, then it gets a little easier mentally.

 

IMO exits are the hardest mental aspect of this business b/c you constantly see what if's that revolve around more $ in your account.

[keymoo 10]

Thanks brownsfan - that's exactly what I am experiencing. However I would like to develop some kind of exit strategy and then follow it. I would rather the market tell me when to get out than use fixed targets because fixed targets, although good from a discipline point of view, tend to get you out of the market too early on big moves. If the move is over then perhaps I should just use a short signal to get out of a long and a long signal to get out of a short?

 

I am not obsessing about capturing the entire move, just the "meat in the middle" as they say.

 

What do YOU do?

[keymoo 10]

How about just using a trailing stop? If it is set just outside normal noise levels then it should be able to ride a trend. For instance on the "other forum" a guy called Jacko uses a 50 pip stop on EUR and let's the trailing stop take him out of the trade. I guess that is one option that could be looked into and tested.

 

Does anyone else want to share their exit strategies?

[SIUYA 11]

There are many types of exit strategies and no right or wrong answer. If you let the market get you out with a trailing stop, then you have to run bigger drawdowns in the PL from peak to trough, profit targets will get you missing the big moves. Its all a trade off - each has its advantages and disadvantages.

Some other ideas are to take partial profits and let the rest run with a trailing stop.

 

In a previous post I read somewhere here someone made a great point.....

ensure the entries and the exits MATCH and make sense for the strategy being applied and apply them consistently.

to me that is a great piece of advice.

[TheDude 10]

I usually have a level in mind as to where the market should get to. I the market looks weak, I will cut the trade, or bring a stop up just under/above the structure to give it a dogs chance. If the market looks very strong, I will hold and see if we go to the next level beyond that.

 

Looking at ES today for example, it would seem clear the day trend is up. My level (given the gap down) would therefore be yesterdays low. Now, there aint a chance in hell that were going to make that. This is a 2 time frame market and looking at the order flow, there seem to be plenty of sellers - probably longer term traders, while the rally is probably being driven by profit taking from the shorts. Just irrelevant opinion of course. The important thing is that the market is far to back and forth to make a nice move up to yesterdays low. My exit from a long then is going to be based on typical length of recent up swings. That will be the level I will use.

 

As Brownsfan wisely said, it's pointless worrying about too early/late. Just look at the numbers and figure it out.

 

I dont worry about shapes, patterns, fibs, trailing stops etc. Too mechanical.

 

(Im no expert though - I often get it badly wrong!! :haha: )

Edited May 25, 2010 by TheDude

[brownsfan019 17]

How about just using a trailing stop? If it is set just outside normal noise levels then it should be able to ride a trend. For instance on the "other forum" a guy called Jacko uses a 50 pip stop on EUR and let's the trailing stop take him out of the trade. I guess that is one option that could be looked into and tested.

 

Does anyone else want to share their exit strategies?

 

Trailers work great in a swift trend - otherwise, you can get ticked out like crazy.

 

The simplest approach is a fixed target. One way to do this is to view your risk and say your profit should be some multiple of that to justify the trade - If risking 10, should go for 15 or more.

 

There's no right or wrong answer and nothing will be perfect. Exits are my biggest mental crutch b/c hindsight trading is so easy.

[Tams 20]

Hi there,

 

I am currently developing a trading plan based mostly on work done by Martin Pring on price patterns, price action. I am looking for the market to signal to me turning points, reversals using price action in confluence with other longer term price patterns and support/resistance levels.

 

Can you recommend any resources on exiting trades? I preferred style of trading is to scale in on longer term charts and then look for an all-out exit. I much prefer this over all-in and scale out as it is less risky. I have written about a potential setup on Platinum Futures here on my blog and I find it easy to get into a trade but not sure where to get out.

 

Thanks for any pointers.

 

keymoo

 

.......... try a bollinger band.

[AmCan1 10]

Interesting thread. I agree that exiting a trade is the hardest part to trading. It is the artsiest part to trading. Lots of great advice so far. Here is what I do that seems quite effective.

 

I like to get out at a dynamic fixed target with part of my position, and trail a stop on the rest. I typically use a 3 bar stop.

 

My fixed target is calculated by the trade setup itself, and is therefore going to adjust to current market conditions. I use price action for my trade decisions but indicators to calculate my targets and stops, so they adust, trade after trade. So a 35 pip fixed target in the cable on one trade could end up being just an 18 pip target on another, for example. It will tune itself to the current market conditions, in other words. If the trade doesn't make it all the way, I have a level where I adjust my risk or lock in a little bit of profit. I will exit both positions at that level. I like this better than some sort of artificially imposed goal of say, 20 pips on every trade. As expressed in earlier posts on this thread, the market might not have enough juice to get 20 pips, or it might have too much juice and greater potential then would be missed. A dynamically tuned fixed target works to solve this problem on a trade to trade basis.

 

Then, if I do get my full fixed dynamic target, I will then employ a 3 bar stop to my trailing position. A three bar stop is a simple concept and easy to trade. It takes the guess work out of the decision and turns an artsie part to trading into an objective rule set. Simply put, using a long trade as an example: If a bar closes with a higher low, I count that as bar 1. The very bar to its left is bar 2. The next one over to the left is bar 3. I put my stop 1 tick below the lowest bar, 2 or 3. I make a minor adjustment around key levels if those levels are where the stop would be (0's and 5's). I don't move the stop until a new bar closes with a higher low than its neighboring bar to the left. Then that bar becomes #1 and I count back again. I keep going with that process, moving my stop up to a tick below the lowest point of bars #2 or 3, resetting my count with every bar that closes with a higher low than it's immediate bar to the left. That's the basic idea. I find it gets me out of the trade most of the time (nothing is perfect as we all know) right where I want to be out of the trade. You can visually see this working on any chart or timeframe. I'm not saying it's the best way to go on all charts and timeframes. But it is worth exploring. You will learn much from the idea.

 

I can miss bigger moves sometimes, but that's the way it goes. I use a reentry strategy to get back in if need be. I also have certain setups where I could scale in more as the trade progresses but I would treat them as separate trades in that I still will go to my dynamically established fixed target, and trail the rest with the 3bar technique, tuned from the scale-in setup itself, and not the primary trade.

 

Hope that helps. Let me know if you have any questions about the 3bar and I'll try to explain it with a chart posting.

[cuttshot 11]

I personally have tried many different techniques for exiting trades. Going for a fixed target has produced the best results for me by far. Just because I say fixed targets doesn't mean they won't ever change. I want my fixed targets to reflect current market conditions. This may sound like adjusting targets defeats the idea of fixed targets but I'm not adjust targets on a daily basis. If I see volatility picking up over a period of time then I will make adjustments to reflect those changes.

 

For example, the NQ has been a very active market over the past number of weeks. I decided to push my targets out from 3 to 3.5 points to try and capture a slightly larger piece of the moves. While this may not seem like a big change, I'm using more of a scalping approach so getting 2 extra ticks on each trade really does make a difference in the bottom line.

 

The problem I have with trailing approaches is I find most to be way too discretionary. This can lead to me second guessing myself many times. For me I would rather have a set plan in place that I can stay disciplined to. I really like AmCan's 3-bar stop method. If I were to trail this would be an idea I would look into. It provides a framework that you can follow each time.

[AmCan1 10]

Cuttshot makes an excellent point. Fixed targets for me, are fixed for that particular trade setup and will adjust with current market conditions. So one fixed target might be different than another, depending on the parameters of the trade itself. Trailing stops do require a competely different mindset. If you have a two position trade where position one comes off at the 'fixed target,' the odds are that the trailing stop will not do as well on most trades. But, if it catches a bigger move, every so often, that could really make a big difference to your overall performance. You have to track the results and compare over time. I have seen where a trailing stop has out produced my fixed targets, say on the Russell emini. But if you look back over the past several months, at least with my method of trading, the fixed targets have outperformed the trailers. There just hasn't been enough larger moves during my trades. So in hindsight, maybe just a 2nd larger fixed target, to exit my 2nd position might have been a better approach. The markets are always changing though and you need to be very careful not to curve fit.

[priyanvada 10]

Hope that helps. Let me know if you have any questions about the 3bar and I'll try to explain it with a chart posting.

 

I Wish to know more about this ... So I request you to please post some charts and illustrate lil more about your 3 bar stop method!

 

Thanks,

[WorldTrader 10]

Today was a great Trading day for trailing. I really want to trail more, but I like the fact of the fixed targets. I will show you what I use for trailing. It is not a 3 bar stop but one of my indicators. Let me know what you think. You can see after the first fixed target, your stop on the trailer was at breakeven or slight profit, so that is good too.

Edited June 29, 2010 by WorldTrader
forgot to upload

[priyanvada 10]

Thanks!

 

Your chart really looks so beautiful with so many stars in it! ... I am curious what are they shining there for ?!

 

Anyways I saw in your specific case after the price hit the fixed target it bounced back to hit it again three times during the Next half an hour, ... So if for half an hour profit is not running at all ...it seems a lots of mental torture for a day trader because possibility that things may reverse anytime during that period ...

 

On the other hand your trailer stop has caught bigger reward than the fixed target and thus getting bigger RR...

 

So it is again a real dilemma again what to go for... Dyno-fixed target with more probability of hitting it or trailer stop with higher RR but relatively lesser probability of achieving it successfully everytime?

[Tradewinds 12]

I preferred style of trading is to scale in on longer term charts and then look for an all-out exit. I much prefer this over all-in and scale out as it is less risky.

 

This is my preference also. But I hadn't thought about something until just now. Why do I find the exits easy? Huh, strange. I guess I view it as, "Oh! The market has just decided to give me lots of money! Okay. Thank you! I'll just take my money now." Could I get twice as much money sometimes? Maybe. Maybe not.

 

I wonder what the statistical analysis of scaling in and all-out exit is? Scaling in probably reduces your draw down stats. Staying "all in" until a good exit probably maxes out the profit potential. If you scale out to early, that decreases your profit. If it's a winning trade, why scale out? Especially if you can get out at break even at worst case scenario.

[SIUYA 11]

I wonder what the statistical analysis of scaling in and all-out exit is? Scaling in probably reduces your draw down stats. Staying "all in" until a good exit probably maxes out the profit potential. If you scale out to early, that decreases your profit. If it's a winning trade, why scale out? Especially if you can get out at break even at worst case scenario.

 

all depends on the strategy really. Some strategies work best scaling in, others scaling out.

Only historical stats can really tell you this, and then you get into a whole other kettle of fish of then how many do i scale in or out at at different levels??

The other thing to take into consideration is - does scaling work for me - does it make sense, does it make sense with the way I am trying to trade and my ideas of the market. If it looks great on paper but you cant do it mentally then so what.

Like everything in trading its another trade off and no correct answer, if you can automate it 100% and test it then you might have some idea.

[Tradewinds 12]

I usually have a level in mind as to where the market should get to. I the market looks weak, I will cut the trade, or bring a stop up just under/above the structure to give it a dogs chance. If the market looks very strong, I will hold and see if we go to the next level beyond that.

 

I keep the same things in mind. Sometimes price will just not break support or resistance. When I see that, I'll adjust the target to a lower profit. Judging "Strength and Weakness" in the price is a very subtle perception. I use 3 generic concepts to interpret all my indicators and price.

 

• Momentum
  
• Strength of the Move - Price, Indicators
  
• Higher or Lower real moves - price and indicators
  

 

Those 3 criteria have many different possible combinations in and of themselves. But then there are even more combinations if you look at patterns, and even more possibilities if you compare short and long term trends. So I look at the "net affect". For example, if the Strength of my indicator was weak, but the price move was strong, I view that as a divergence, and may give more weight to the indicator. In fact I will look for at least some retracement if price is moving much stronger than my indicators.

 

There are situations where there is a very strong move up in an indicator, but price doesn't go higher. So what does that mean? Sometimes it means that price is at the beginning of an even stronger up move. It depends upon the greater context.

[Tradewinds 12]

then you get into a whole other kettle of fish of then how many do i scale in or out at at different levels??

 

Right now I view scaling in like this:

 

• Minimum order at high probability fill
  
• Bigger order at good probability fill
  
• Small order at low probability fill
  

 

For example: Enter Long.

 

1 Contract at Support Line

2 Contracts lower than Support Line

1 Contract even lower

 

That combination puts the bulk of the position right in the middle. (Think of a standard Bell Shaped distribution curve.) If there is a big price move down at the long entry, everything fills. If only one contract is the total risk, rather than 4, then I'd put the order at the less likely fill, but better position. If 4 contracts are risked, the overall draw down is lesser. There is actually more profit potential if there is a big price move down at the long entry and everything fills. As long as the order eventually goes in your favor.

 

That combination almost guarantees a fill, and gets you into the trade. If you misjudged the entry price, then you are still in a great situation because you have more fills, and a greater profit potential.

 

All of this assumes that the trader has good setups for entry, and that the RANGE of price variation and draw down is a secondary issue. Sometimes the consolidation range is wider than at other times. It depends on the volatility and whether it's a longer or shorter term trend. The bottom of a yearly trend would probably have a much larger consolidation range than the bottom of a intraday trend.