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.



After you`ve set your initial stop loss, chosen your method for calculating your trailing stop loss, and implemented all your money management rules, there is one last thing you should do; you should begin back testing your system.

With out back testing you will be headed in the right direction, but you won`t know what to expect from your system. Back testing will also give you the confidence to keep going when you begin to experience the doubt that every trader faces at some time.

Back test your system by applying the rules and conditions of the system to the stock`s historical market data. However, this is only possible if you`re trading a system that is entirely mechanical and does not require any human input to place the trades. How do you know whether or not your system is completely mechanical for back testing? Can you take down your trading plan, the set of rules and guidelines that you follow, and hand that over to someone else, who could then trade the same system and receive the same results as you would if they followed the system carefully?

If you can do this, you have a mechanical system that is ready for back testing. If you can`t, you should look at implementing a completely mechanical system. Perhaps one of the hardest parts in trading any system is to have the confidence to stick with your system. In fact, a mechanical system almost forces you to make decisions that are in direct conflict with what your gut feeling might tell you to do.

Remember, our gut feeling tells us we should hold on to losing stocks until they get to the break even point, and our gut feeling would tell us to sell shares as soon as we`re a little bit in profit. Obviously, a mechanical system goes against these human tendencies, and that is one of the reasons why it`s psychologically difficult to trade. However, back testing a mechanical system, will tell if you it your plan will work or not.

While back testing will not tell you with 100% accuracy what the profitability of your system will be once you start trading it, it will give you a very good sense of what you can expect. All prices are driven by the same two factors, supply and demand, in the present and in the past. So, even though price movements are never going to be exactly the same, in your back testing you will see the patterns, and similar movements that show up over time. With back testing you can discover the how profitable you system is likely to be, and how often you are likely to have a loss rather than a profit.

Back testing your system over different market conditions, it can be reasonable to draw parallels as to the performance of your system historically to its performance trading it in real time. Knowing this, because of back testing, will make it much easier to stick with your system, and the profits you can realistically skyrocket.

If you’re looking for a good piece of technical analysis software to do the back testing for you you should have a look at MetaStock End-of-Day or MetaStock Professional (for day traders).

-=-=-==-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=- David Jenyns is recognized as the leading expert when it comes to MetaStock and designing profitable trading systems. His MetaStock website offers a huge free collection of trading related tips and tricks. Gain free access now. Click Here ==> http://www.meta-formula.com/subscribe -=-=-==-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=- Article Source: http://EzineArticles.com/?expert=David_Jenyns

]]> http://www.financialmarketplace.com/the-idiots-guide-to-back-testing-trading-systems/feed/ 4 http://www.financialmarketplace.com/wonder-which-charting-software-is-the-most-popular/ http://www.financialmarketplace.com/wonder-which-charting-software-is-the-most-popular/#comments Mon, 03 Nov 2008 16:49:10 +0000 admin http://www.financialmarketplace.com/?p=193 I recently came across the following blog post that ranked (based on an internal survey) the most popular charting software was. Note that the sample size is unknown (although it’s stated that it is in the 100’s) but interesting nonetheless. Nice to see MetaStock in the top 10!

The Most Popular Charting Software is …

Posted by: Barry Burns

Recently I took a survey of my students asking which charting software they use.

This is only a small sample, and therefore not necessarily representative of which software is the most popular in the world, or even the US. It only reflects the responses I received from my students who responded to the survey.

I received hundreds of responses and thought you may be interested in the results. So here they are, rounded to the nearest whole number (you’ll notice that they total more than 100%, and that is because many people use more than one software for charting):

1. Ninja Trader: 42 %
2. Tradestation: 30 %
3. Meta Trader: 27 %
4. Interactive Brokers: 21 %
5. eSignal: 18 %
6. MetaStock: 16 %
7. Think or Swim: 14 %
8. GFT: 13 %
9. Ensign: 12 %
10. Telechart: 12 %
11. FXCM: 12 %
12. TD Ameritrade: 8 %
13. Fidelity: 6 %
14. MultiCharts: 6 %
15. E Trade: 4 %
16. Schwab: 4 %
17. NeoTicker: 2 %
18. QCharts: 2 %
19. Other: <2 %

What charting software do you use?

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.

-=-=-==-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-
David Jenyns is recognized as the leading expert when it
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
downloading your FREE copy of David’s new Ultimate
Stock Trading Systems course.

Click Here To Download ==> Stock Trading Systems
http://www.ultimate-trading-systems.com/forex.html
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