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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?

C.

==

Here’s what I told him…

C,

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 [1]. 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 [2] with reasonable winning trades. Don’t dig a hole so deep you need a miracle [3] 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…

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

What else could help C. in this situation?

Trade Like a Bandit!

Jeff White
Producer of The Bandit Broadcast [5]

Are you following me on Twitter [6] yet?