Trading Tips: Identifying the Initial Warning Signs and Exiting a Trade

by Tom Black
Trading Tips: Identifying the Initial Warning Signs and Exiting a Trade

Exiting a trade is tricky and how you exit determines the quality of your trade even more than how you enter it. If you mismanage the exit, even a good trade can lead to a loss. Moreover, exits also influence the emotions and the psychology of a trader and thus, can affect his/her trading decisions in future trades. So, be careful and take the whole trading situation and the chart into context before you exit a trade. 

Exits: Rigid v/s Flexible v/s Emotional

Traders exit their trades in three ways, and you need to understand which category you belong to. 

A trader who uses rigid exits uses pre-defined hard take profit orders that close the trade automatically when it reaches a specific price level. If a trader can use rigid exits while not messing with the trades, then he/she can eliminate most emotional problems. However, although most people think they are using rigid exits, in reality, they belong to either the flexible exits or emotional exits category. 

When the rigid exit is used, the trader cannot react to changes in price movements, which means that it lacks flexibility. The second category, which is the flexible exit, has a more discretionary exit approach. Generally, the flexible exit combines manual discretionary with hard take profit orders. When traders see that price can no longer reach the take profit, they can exit the trades manually. 

However, if a flexible trader gets too emotional to follow the rules, he/she moves into the category of emotional exits. Most traders do emotional exits unknowingly. These exits are impulsive, and traders forget to take the whole chart into account and only concentrate on their profit or loss. As a result, they face psychological problems later. 

Price Follow-through and Time-stop

Traders misinterpreting price information is a common problem frequently noticed during a trade. Assume that you enter a buy/long trade expecting the price to go up or you may not have entered it. Now, the price may not go along with your expectation and cause trouble for you. This is why you need to know about time-stop.

After entering a trade, if the real price action does not match your expectations, you need to get out of the trade quickly. Keep in mind that staying in trade without confirming analysis and hypothesis is nothing but a gamble and usually, the profitability of the trade is low. Traders often make the mistake of not exiting. Instead, they hope that price may still make it to the target somehow, which leads them to lose. A trade is a hypothesis and traders bet their money on it. If the hypothesis is not working in your favour, you must take your money away before you lose it. 

The Initial Warning Signs to Exit a Trade

High Volume Days

The average volume for a day is fifty or sixty sessions and you need to monitor it because the volume should not go a lot higher. If on certain days, the volume goes three times higher than the average volume, then you must lookout for it. If the events take place in the direction of the long or short position, you can relax because they will be profitable. However, if they go in the opposite direction of the position, it is an initial warning sign, especially if significant support or resistance level is broken by the adverse swing. 

You have to keep in mind that uptrends require constant buying pressure and you can observe it through OMV or any other volume director. Similarly, downtrends require constant selling pressure. Traders can observe it as a distribution. High-volume sessions opposing position direction undermine accumulation-distribution patterns. It frequently signals the beginning of a profitable phase in an uptrend in an uptrend and value buying in a downtrend. 

Trend Changes and MA Crosses

Short-term, intermediate, and long-term MA allow you to analyze instantly just by looking at the relationship among these three lines. Long positions face risk when short-term MA goes through long-term MA. Similarly, it is risky for short sales when the short-term goes through the long-term.

Another warning sign is price action when the intermediate MA changes slope alters slope from high to sideways during long positions or low to sideways during short sales. You must not stick around at this time to wait for the long-term MA to alter slope since the market may be unmoving for a long period during flatlines which undermines opportunity-cost. It also makes it difficult for a trend to change. 

Failed Price Swings

Markets usually trend only fifteen to twenty percent of the time. During the rest of eighty to eighty-five percent of the time, it gets stuck in trading ranges. Strong trends in both directions consolidate current changes in price by easing into trading ranges. Thus, they lower volatility levels along with encouraging profit-taking. You may consider this as a part of natural healthy trend development. 

However, by exiting the range in the opposite direction of the previous trend swing, a trading range becomes a top or bottom. Price action generates an early warning sign for a trend change when a trading range gives way to a breakout or breakdown as expected, but then quickly reverses, with the price jumping back within range boundaries. These failed breakouts or breakdowns indicate that predatory algorithms are targeting investors in an uptrend and short-sellers in a downtrend.

To be safe, you should exit right after a failed breakdown or breakout, whether you take profit or loss with you. You can enter again if the price exceeds the low of the breakdown of high of the breakout. Re-entering the market is safe since the recovery indicates that the failure is overcome and thus, the underlying trend can resume. More frequently, the price swings to the other side of the trading range when a failure takes place and it enters a sizable trend, going in the opposite direction. 

With the right exit, you not only avoid risks and minimize losses but also maximize profits. That is all you need to be a successful trader.

You may also like

Leave a Comment

CAPTCHA ImageChange Image