STEP-5: Selection of correct exit targets
Apart from the Donchian stop we spoke about that will naturally act as a "trailing stop" to rise with the share price, we need to program in profit exits. Novices fail because they fail to identify their profit exits upfront. Getting into a trade is easy - it’s the getting out part that is tricky and determines your success or not!
Let’s look at that hypothetical trade again:
We chose two well picked exit locations where its highly likely the share price is going to encounter resistance. Many trades may only have a single EXIT level but this one has two, which we call a "staged EXIT" strategy that works as follows to reduce your trade risk and raise the odds of a successful outcome:
- When the share price closes above EXIT1, offload half your positions and make EXIT1 your new stop (trade abort) level.
- When the orange trailing stop rises above EXIT1 it takes back the role as stop
- When the share price reaches EXIT2, close out all your remaining positions
Some traders elect to not offloading half their positions at step (a), but follow all the other rules, which is also fine. It can yield higher profits but is obviously riskier since it doesn’t offload 50% of the trade to bank profits - who says the trade will reach all the way to EXIT2?
Dwaine van Vuuren
RecessionAlert, Sharenet Analytics
Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com (US based) and PowerStocks Research (now Sharenet Analytics) into companies used by hundreds of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.