At a recent trading convention two well known traders discuss the ins and outs of trade exits. Read on to find out how successful traders make their trade exit decisions…

Mark McRae is surprisingly forthcoming about his worst trade experience when asked.

On one occasion he explained, I was long on the euro, and I was long for quite a large amount – and I got a visitor come in from nowhere. So instead of closing the trade – (or I thought I closed the trade by going short)- I actually bought again. So after a few hours, my visitor had gone. I can’t remember the exact amount, but I was down $20,000 or $30,000 on this trade, and it was one of the worst trades, not because of the amount I lost, but because I couldn’t believe I was so silly about not checking it. With this particular trade, I left it, for about four hours and watched it, and eventually got out with a loss luckily!

On the other hand, one of his best trades wasn’t in the Forex market. It was in the indexes where America had a surprise rate increase. Mark just happened to be the right side of the market. “I couldn’t believe it. It took me about five minutes to figure out why I had almost tripled the amount I was trying to get that day, (which was very nice of course). I think that was one of my favorite trades. I was on the phone to the broker, and I was arguing with the broker about the price that he had given me. Actually it was the NASDAQ. And he said to me, they’ve just changed the interest rates. Do you want in or do you want out? He said you get ten seconds. I said, ‘I’ll stay in.’ And I didn’t really know it, but I was trying to figure out in my brain whether this was good or bad, but I said I will stay in, and then there was this huge leap, so that was definitely one of my nicest trades” Mark advises.

So How Does Mark Decide When To Make A Trade Exit?

When something unexpected like the NASDAQ experience occurs, it’s almost like a windfall. He then went on to explain that he got out about five minutes after seeing the peak. It wasn’t technical at all, he just thought whoopee, this is good, and closed the trade.

But that’s not how he trades now. Mark has refined his level of patience now. “You know, the big fluctuations don’t frighten me anymore. And also, I don’t know if you find this, but I’m very often on the wrong side of the market when I go in. In other words, I don’t go into the market, and then immediately I am successful, or the trade goes in the right direction.

Very often, the market will move against me for a bit, so I’ve got to be comfortable with the market moving against me. It doesn’t scare me anymore. Although this does take discipline to stay in long enough and not panic and pull out. Obviously, it takes a lot to frighten Mark out of a position. He now makes up his own mind when to make a trade exit based on his target established.

Mark advised us that for a long time, he used to trade indices. The reason is because this is a much faster moving investment. Previously, Mark believed Forex was fast until he started trading the SMP.

Mark explained that exiting trades requires a plan and established targets so he knows what to head for. Generally speaking, due to Marks experience he tends to use the stop losses as the orders to get in and out of a market as a safety valve.

An example of this is if you look at the recent break in the dollar – you’d be crazy to get out of the market. Mark explained it just kept dropping like a brick.



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One of the cardinal rules of Forex trading is to keep your losses small.

With small Forex trading losses, you can outlast those times the market moves against you, and be well positioned for when the trend turns around. The proven method to keeping your losses small is to set your maximum loss before you even open a Forex trading position. The maximum loss is the greatest amount of capital that you are comfortable losing on any one trade. With your maximum loss set as a small percentage of your Forex trading float, a string of losses won’t stop you from trading. Unlike the 95% of Forex traders out there who lose money because they haven’t applied good money management rules to their Forex trading system, you will be far down the road to success with this money management rule.

What happens if you don’t set a maximum loss?

Let’s look at an example. If I had a Forex trading float of $1000, and I began trading with $100 a trade, it would be reasonable to experience three losses in a row. This would reduce my Forex trading capital to $700. What do you think those 95% of traders say at this time? They would reason, “Well, I’ve already had three losses in a row. So I’m really due for a win now.”

They would decide they’re going to bet $300 on the next trade because they think they have a higher chance of winning.

If that trader did bet $300 dollars on the next trade because they thought they were going to win, their capital could be reduced to $400 dollars. Their chances of making money now are very slim. They would need to make 150% on their next trade just to break even. If they had set their maximum loss, and stuck to that decision, they would not be in this position.

Here’s a perfect illustration why most people lose money in the Forex trading market.

Let’s start out with another $1,000 float, and begin our Forex trading with $250. After only three losses in a row, we’ve lost $750, and our capital has been reduced to $250. Effectively, we must make 300% return on the next trade and that will allow us to break even.

In both of these cases, the reason for failure was because the trader risked too much, and didn’t apply good money management.

Remember, the goal here is to keep our losses as small as possible while also making sure that we open a large enough position to capitalize on profits. With your money management rules in place, in your Forex trading system, you will always be able to do this.

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comes to designing profitable stock trading systems.

Discover the “secret formula” of trading that anyone can use
to consistently generate BIG profits from the market by
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Article Source: http://EzineArticles.com/?expert=David_Jenyns

There are a couple of reasons:

First, to warn you about the worst Forex trading strategy, because you really don`t want to end up using this system.

Second, because once you know the worst possible Forex trading strategy, the one that is designed to maximize your losses over the long run, then you can reverse it to craft a strategy which does the exact opposite.

With what you learn from the worst Forex trading strategy, you will be able to create a system that will produce some tremendous long-term gains. The worst Forex trading strategy I`m referring to, which is simply the worst Forex trading strategy I have ever encountered, is known as averaging down. This horrifying Forex trading strategy is the process of buying more shares that you had previously acquired, as the price drops.

Traders often purchase shares this way in an effort to reduce their initial entry price.

Only bad investors average down by buying shares of a sinking assests to decrease their overall average price per share. This Forex trading strategy is hardly ever effective, and is often like throwing good money after bad. It also magnifies a trader`s loss if the share keeps dropping. Remember, just because a share is cheap now that doesn`t mean it`s not going to get any cheaper. However, let`s examine how this devastating Forex trading strategy works. Say you bought one thousand shares at $40.

The novice investor may not have a stop loss in place, and the share price falls to $30 dollars. Here comes the stupidity of this Forex trading strategy — to average down the novice trader might by another thousand shares at $30 to lower the average cost per share that he`d already purchased. So, his average cost per share would now be $35.

Unfortunately, the share price may fall even further, and the novice trader will again buy more shares to reduce the average cost per share. They end up buying more and more into a share that`s losing their money.

Now, imagine this Forex trading strategy being applied to a portfolio of assets. In the end, all the capital will automatically be allocated to the worse performing assets in the portfolio while the best performing assets are sold off. The result is, at best, a disastrous underperformance versus the market.

If a trader uses an averaging down system and uses margins, their losses will be magnified even further. The biggest problem with this Forex trading strategy is that a trader`s gains are cut short, and the losers are left to run. My advice is — never average down. The process of buying a share, watching it fall, and then throwing more money at it in the hopes that you`ll either get back to break even or make a bigger killing is one of the most misguided pieces of advice on Wall Street. Never be faced with a situation where you`ll ask yourself, Should I risk even more than I originally intended in a desperate attempt to lower my cost and save my butt?`

Instead, design a simple, robust system with good money management rules. I can practically guarantee the results will be better than averaging down.

by David Jenyns

http://www.ultimate-trading-systems.com/forex.htm

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