Microsoft Word - Let the market take you out, not your emotions

Members Only Article –

Learn To Trade The Market

Exits: Let the market take you
out, not your emotions …

Nial Fuller

Every trader that has any live trading experience under their belt knows how
difficult it can be to figure out when to exit a trade. In fact, most professional
or experienced traders will tell you that exiting a trade is the single most
difficult part of trading. Unfortunately, most forex traders end up doing the
exact opposite of what they should do when it comes to exiting a trade; they
exit manually on emotion rather than simply letting the market hit their stop
loss or profit target.

The problem with profits….is that they are really hard to take. This might
sound strange to someone brand new to the world of trading, but to the
seasoned trader it is all too familiar. Once you are in a trade that is up some
decent pips, you see no reason to close it out, after all why would you if you
see no reason not too? You decide to let this trade run because it is looking so
strong in your favor right now, and you really need a big winner. While letting
profits run is the name of the game of forex success, most traders simply do
not do it correctly. If you are going to let that profitable trade run than you
must either trail up your stop loss to lock in some profits or you must take
profit at a pre-defined profit target as part of your pre-defined trading plan.

The reason why so many traders are terrible at taking profits is because they
have no pre-defined exit strategy. Entries are easier because they are more
definable and thus less subjective than exits. The only way to take emotional
impulses out of the equation of exiting trades is to KNOW WHAT YOUR EXIT
STRATEGY IS IN ADVANCE. When you know what your exit strategy is before

you enter a trade, there is no possible way you can make an emotional trading
mistake, unless you consciously override your pre-defined exit strategy, in
which case you will know why you messed up and thus be more inclined to
follow through with your pre-defined exit strategy on future trades.

Example:

The USDCAD daily chart fired off a large pin bar reversal back towards the end
of May. If you sold a break of the pin bar low you would have gotten filled and
then immediately saw price retrace up to about the 50% level of the pin bar.
Many traders would have freaked out here and taken a loss just before price
reversed and fell like a rock in their favor. You must really learn to “set and
forget” your trades once you enter them so that you do not attempt to
“control” the market like this. (see image below)

Eliminate greed by writing into your forex trading plan a clause that says
after any trade closes out you will walk away from your computer for
however it long it takes you to cool down and get your mind off the markets.
Whether its 24 hours or a week, if the only way you can eliminate wanting to
jump right back in the market after a big winner or a big loser is by physically
removing yourself from your trading desk, than do it. Pre-defining these types
of actions is how successful forex trading businesses are run. Some people
have inherently higher levels of self-discipline than others when it comes to
trading, however, even for those people with a plethora of self-discipline; it is
not going to hurt to make sure you have everything pre-defined in regards to
your trading.

The point of walking away from your computer after a big winner is to
eliminate greed. How many times have you had an awesome trade and then
saw it continue on in your favor without you aboard? This happens all the
time and it is just an inherent aspect of the way the markets work. You cannot
possibly ever make every single pip on every single move in the forex market,
the sooner you accept this fact and move on the sooner your trading will take
a dramatic turn for the better.

The problem with losses is that they make you emotional just as winning
trades can, but in a different but equally dangerous manner. Losing trades
should be viewed as a business expense; the cost of doing business in the
forex market is losing trades. Just like any business you need to make sure
your revenue is greater than your cost if you want to make consistent money.
MANY forex traders make the error of over-trading or risking too much; this
makes their cost much higher than any revenue they make from winning
trades, therefore eventually forcing them out of the forex trading business.

Eliminate fear by setting a pre-defined stop loss and not moving it. Period.
Don’t move your stop loss further away from your entry price because you
think you see a very solid looking price action signal forming that you think
will spring price back up to where you can get out at break even. A general
rule is that if price has moved far enough against you to hit your stop loss than
it very likely means the market is switching momentum, at least for a short

period of time, and since you don’t know how long this momentum will last
there is simply no reason to assume the market will come back in your favor.
Accept that losses are a part of forex trading and you will be on the road to
consistent trading results much sooner than what otherwise would be
possible.

Just as you should pre-define what you will do after a winning trade, so you
should pre-define what you will do after a loser. Maybe you need to physically
detach yourself from your computer in order to keep yourself from jumping
back in the market to get your “revenge”. Maybe you just need to switch over
to demo trading for a while to get yourself back on track and cool down a bit.
Whatever you decide works best for you after a losing trade or a series of
losing trades, make sure you write it into your trading plan so that you have a
concrete and tangible plan for what to do when you have a losing trade,
because you WILL have them.

Professional traders understand that trading is simply a game of probabilities.
We set the probability in our favor by taking price action setups that look very
obvious and that provide a great risk to reward pay off. Over time, if you have
enough discipline to only take obvious high-quality price action setups and let
the market take you out of your trades instead of your emotion, you will
become a consistently profitable trader.

Example:

Gold recently fired off a great daily fakey setup with the bullish momentum.
After the fakey / pin bar formed price retraced ALMOST the entire length of
the fakey bar. Many traders would have “freaked out” and exited the trade
early just as price was nearing the low of the fakey bar. Many times price will
retrace like this and then take off in your desired direction. You must really
learn to “set and forget”, otherwise you will end up kicking yourself once price
takes off in your favor and this will induce more emotional trading mistakes.
(see image below)

I will end this member’s only article with this concept; allowing the market to
take you out of a trade at your pre-defined profit target or stop loss placement
is the correct way to use your intellect and logic to exit a trade. The reason for
this is that when you define your exit strategy prior to entering a trade you
are operating as objectively as you can, assuming you are not planning on
over-leveraging yourself. Anytime you “think” you are using your logic and
intellect to exit a trade by manually exiting based on something you “see”
while your trade is live, you are exiting on emotion. And while you may indeed
save yourself some lost pips or perhaps squeeze a few more out by manually
over-riding your pre-defined exit strategy, when you trade in this way you are
not trading in harmony with the market, but instead you are trying to control
the market. The only way to trade in harmony with the forex market is to
eliminate all emotional behavior by pre-defining all of your trading activities
before you enter a trade.

Talk Soon

Nial Fuller –