Understanding Trade Exit And Stops

In whatever trade market you are on, your trading system should always contain rules or initiatives that would prevent you from further losing money, should the market is not working in your favor. One of these is a proper trade exit. This is part of risk management that you should take seriously or else you will continue to lose within your market.

Probably you have already set your system on how to spot a good trading opportunity and you have already set your maximum loss. What this means is you should know when it is time to exit a market when you are already losing some money. Because sometimes while you expect to lose money but also expect for the market to turn and finally become productive for you, sometimes the loss has started to gain too much that it should be reasonable to know when to stop the loss.

We call these stops and there are two kinds of stops. One is the initial stop and the other one is called the trailing stop. Let us first define the first one.

An initial stop is your predefined point on when you will be exiting a trade. To put it simply, while it may not sound good to you, it is knowing and admitting that are losing heavily in the trade and so it makes sense to bail out. Otherwise you will continuously lose money. This is a part of a good trade exit that you should have in place from the very beginning.

The other one is called the trailing stop. It is set in almost the same way as an initial stop; based on indicators, percentages and technicals. A trailing stop is calculated from the highest price point when you entered a trade. What this means is that your exit point or stop is not on a fixed price as that of an initial stop. It actually changes or moves as the trade price changes. The Nicolas Darvas system teaches when or how to set up a stop so you do not make too much of a loss.

The hard part of this method is in balancing when you are raking in the profit before the trend finally stops. This balance also means you should know when you are already parting off too much of the profits because you are already on the losing end.

On the other hand, the great part with the trailing stop is you can take advantage of the trend for as long as it is in your favor. This way you are actually minimizing your losses, even if you are just taking in very little profits because of the way the market is trending.

If you go through most stock trading strategies, you will find out that it is indeed a necessity to define your stops very early in the game. Preferably before you even enter a trade or a market. This way you will avoid taking in great losses when you could have already exited the market at the right moment, if only you have stops to guide you.

Just keep in mind that having a trade exit is a necessity for every trader, even for a legend like Nicolas Darvas. You should also understand that it is normal to every now and then for you to experience some losses. What sets good traders from bad traders is the capability to know when it is time to pull the stops.