May 23, 2011 at 10:10 am | | Comments 4

Premature Evacuation from Trades

trading-premature-exitAll of us have the occasional urge to jump ship early from a trade, but when is it the right time and how should that be done?

Let’s take a look at a conversation I recently had with a trader I was helping…

Hey Jeff,

I’m long ***, as it just looked like a nice setup. I went long 4 days ago, but it is behaving horribly. Currently I don’t see any pattern and would not make this trade now, but it is only halfway to my stop loss. I am unsure what to do.  How do you approach trades you aren’t convinced of anymore, but have not been stopped out of?

Also, one of the mantras I read often is “cut losses short, let winners ride.” I am wondering how to interpret this “cut losses?” I find myself thinking, “I am not convinced in this trade anymore, but maybe it will turn around, it’s just half a position left to lose.” When my analysis of the situation shifts, and I wouldn’t take this trade anymore as of today, do I abandon my original plan and exit immediately or should I stay with the trade?



Here’s what I told him…


Let me start off by addressing the “cut losses short” question. I don’t have all the answers, but I can tell you that for me, cutting losses means having an exit plan on the downside with defined risks. We will all be wrong at times, but staying wrong is different – don’t stay wrong! Limit your losses so that they can be overcome with reasonable winning trades. Don’t dig a hole so deep you need a miracle to get out – that’s cutting your losses short.

Now let’s discuss early exits on trades like this where your conviction level has changed…

Occasionally you’ll find trades like this which don’t completely fail (stop you out), yet don’t work either (move to your targets). Instead, they just begin to stagnate and enter into a trading range where your funds are tied up. It can be a bit frustrating, simply because you’re left in limbo, wondering if the trade is in the process of failing or working. Each new red or green bar feels like the start of something meaningful, but they’re followed by the opposing color and you soon realize that price is simply showing indecision.

A key consideration to make when this happens is whether the character of the stock has changed. Stated otherwise, do you have a good reason to now lack conviction, or is it merely a mood shift for you?

A slow-moving trade is far different than one which may have just experienced an important technical event…

  • Just because a trade isn’t developing quite as quickly as you would have wanted doesn’t mean it’s destined for failure.
  • The stock may be building a new pattern which you simply haven’t identified yet.
  • When I find myself in a trade which is starting to bore me, I know I’m overanalyzing when I start looking for signals which aren’t there.
  • If I’m positioned in accordance with the overall market (ie: long in a market uptrend), and if my trading capacity isn’t restricted because of this position (I don’t need to free up capital), then what I need to do is stay with the trade until a technical reason prompts an exit. I likely need to stay patient, as this is still a trade which can pay me.

On the other hand, there are times when a premature exit may be warranted…

  • When the stock has just seen a change in character as measured by a technical event (high-volume reversal, for example), an adjustment may be called for.
  • If your trading funds are limited and you’d rather shift into a better idea, then you might consider closing out the trade in favor of another with more promise.
  • When you find yourself positioned in opposition to the prevailing market trend (ie: long in a market downtrend), then you have grounds to at least lighten up. That can be done either by reducing your position while maintaining your original stop & target parameters for the trade, or by tightening both your risk and objective.

What else could help C. in this situation?

Trade Like a Bandit!

Jeff White
Producer of The Bandit Broadcast

Are you following me on Twitter yet?

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  1. I also place a time stop on a trade, especially if I’ve made the trade because of an expected market catalyst. Look at the time you held your winning and losing trades. You may find that all of your losers have longer holding periods. Now you’ve got your time stop for your style of trading.

  2. I like that B, thanks for posting this. But it’s so easy to overlook trade stats and try not to learn anything from them! 😉

  3. When I have a position that I believe in for a longer term goal, I often will go with puts for protection instead of stop losers. Not to be paranoid, but we are mosquitoes on the rump of the big boys like hedge funds and mutuals, and they do want to swat us. The change in margin requirements certainly seems like it was engineered to deal with some of us upstarts and secure a good entry price at the same time. Puts are not cheap, but not as expensive and frustrating as getting stopped out just to see a breakout a few bars later. If my thesis is still wrong at expiration, I let the stock be put to someone else. My position in precious metals probably would have been stopped out a few times, but the puts have let me stay in past those points. I only run with puts when things start getting hincky.

  4. That’s a good way to do it John, and yes you are right, we are the small guys in this jungle! I’m always saying I don’t want to start a wave, I’d much rather jump on one that a bigger fish or whale is creating and just catch a ride. Anyway, thanks for sharing your thoughts on this!

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