Deliberate Exit Strategies

Trading practice often shows that correct definition of an appropriate moment to exit from the market requires much more efforts from a trader than opening position. How to optimize profit avoiding excessive losses and at the same time without missing the right possibility? Having read this article the answer for this question should become clear.

A successful trading position often brings as much nervousness as unprofitable one: the higher profit on the account is, the higher anxiety for its safety grows. How to find balance? It is one of the basic problems of trading. The right solution for this problem finally defines a management efficiency of the capital in the investment markets. Keeping profit in trade using simple financial tools such as equities, futures or currency, will be helped by a correct choice of the moment of closing a successful position.

Exit at correction
This method suggests an exit from the trade which is formed against a current trend, a trade that has brought success as a result of actual rate reversal. Usually the beginning of reversal of price action is featured by intensive development of events, for example the rate moves rapidly until reaching the level where many traders start following the trend of opposite direction to a current one. This point is located at one of the levels defined by Fibonacci numbers. The widely used Fibo-levels are 0.382 (38.2 % retracement) and 0.618 (61.8 % retracement).

The first Fibo-level will probably become the first resistance level (for upside trend) or support level (when falling) and it may become a place where the further direction of a current trend will be defined. The probability of break of this Fibo-level often coincides with its ability to resist and bring rate reversal. Therefore, if the profit is obtained at this point, it makes sense to close partially or completely profitable positions, switching to tactics of observer searching for an appropriate moment for an entry into the market.
Defining a Fibo-level is not difficult. It is sufficient to determine the last unidirectional trend of the market which has come to the end before reversal signs. Measuring 38.2 % correction of this movement will show us the right point to close a position, taking the profit.

Exit at the level of previous break
This way is suitable in case when an entry into the market has been made against the trend that was generated as a result of break of the previous trend. Actually many players hope that the trend has not been broken yet or they rely on a strong correction, especially if a trend line break brings a good impulsion movement. But the price movement providing return to the last broken trend can halt. The given fact indicates a right point of an exit from the current position at the level where the rate has broken out a trend.

Exit at support or resistance level
Closing position against currently existing trend may often bring good results. It can be of much use when a new trend is initiated as a result of support/resistance level break after sideway trading, i.e. flat is substituted by downside or upside trend. Very often the market comes to the level of break of its last top (in upside trend) or bottom (in downside one). This level is the most appropriate to close position, opened against the previous market trend. At the same time the possibility of opening a new short-term position from the same level cannot be ruled out.

As a conclusion, we may assume that complicated and deliberate trading actions of an investor cosist of simple elements, based on simple decisions. One of such decisions is the appropriate moment to close a successful trading position. So sound mind and grounded thinking are the best instruments to provide good results in taking such decisions.

Regards, Dennis Vydrin