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EXITING STOCK TRADES
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Taking a loss can be emotionally hard, but taking a profit can be even harder. You can take a small loss automatically if you have the discipline to set a stop the moment you enter a trade. Taking a profit requires more thought. When the market moves in your favor, you need to decide whether to stay put, get out, or add to your position.

An amateur can tie his mind into a knot trying to decide what to do about a profit. He multiplies the number of ticks by their dollar value and feels a surge of greed: Let the trade run, make even more money. Then the market ticks against him, and he is hit with a jolt of fear: Grab that profit now, before it melts. A trader who acts on his emotions cannot make rational decisions.

One of the worst mistakes of traders is counting money while they have an open position. Counting money ties your mind into a knot. It interferes with your ability to trade rationally. If you catch yourself counting paper profits and thinking what you can buy with them—get rid of those thoughts! If you cannot get rid of them, get rid of your position.

If a beginner cashes out too early, he kicks himself for leaving money on the table. He decides to hang on the next time, overstays a trade, and loses money. If a beginner misses a profit because of a reversal, he grabs the first profit on the next trade and may well miss a major move. The market tugs on the amateur's emotions and he jerks in response.

A trader who responds to his feelings instead of external reality is certain to lose. He may grab a profit here and there but will eventually bust out, even if his system gives him good trades. Greed and fear destroy traders by clouding their minds. The only way to succeed in trading is to use your intellect.

Quality Before Money

The goal of a successful trader is to make the best trades. Money is secondary. If this surprises you, think how good professionals in any field operate. Good teachers, doctors, lawyers, farmers, and others make money—but they do not count it while they work. If they do, the quality of their work suffers.

If you ask your doctor how much money he earned today, he won't be able to answer (and if he can, you do not want him for a doctor). Ask your lawyer how much money he made today. He may have a general idea that he put in some billable hours, but not exactly how many dollars he made. If he counts money while he works, you do not want him for a lawyer. A real pro devotes all his energy to practicing his craft the best he can — not to counting money.

Counting money in a trade flashes a red light—a warning that you are about to lose because your emotions are kicking in and they will override your intellect. That is why it is a good idea to get out of a trade if you cannot get money off your mind.

Concentrate on quality —on finding trades that make sense and having a money management plan that puts you in control. Focus on finding good entry points and avoid gambles. Then the money will follow almost as an afterthought. You may count it later, well after a trade is over.

A good trader must focus on finding and completing good trades. A professional always studies the markets, looks for opportunities, hones his money management skills, and so on. If you ask him how much money he made on the current trade, he will have only a general idea of being a little or a lot ahead of the game, or a little behind (he can never be a lot behind because of tight stops). Like other professionals, he focuses on practicing his craft and polishing his skills. He does not count money in a trade. He knows that he will make money, as long as he does what is right in the markets.

Indicator Signals

If you use indicators for finding trades, use them also to get you out of trades. If your indicators are in gear with the market when it is time to buy or go short, use them to decide when it is time to sell or to cover.

A trader often becomes emotionally attached to a trade. Profits give people a high, but even a loss can tingle the nerves, like a scary but exciting ride on a roller coaster. When those indicator signals that flagged a trade disappear, get out of the market fast, regardless of your feelings.

For example, you may go long because a 13-week EMA has ticked up on the weekly charts while daily Stochastic fell into its buy zone. If you go long, decide in advance whether you will sell when daily Stochastic rallies and becomes overbought or when the 13-week EMA turns down. Write down your plan and keep it where you can always see it.

You may go short because weekly MACD-Histogram ticked down and daily Elder-ray gave a sell signal. Decide in advance whether you will cover when daily Elder-ray gives a buy signal or when weekly MACD-Histogram turns up. You need to decide in advance which signals you will take. There will be many signals—and the best time to decide is before you enter a trade.

Profit Targets, Elliott, and Fibonacci

Some traders try to establish profit targets. They want to sell strength when prices hit resistance or buy weakness when prices reach support. Elliott Wave theory is the main method for trying to forecast reversal points.

R. N. Elliott wrote several articles about the stock market and a book, Nature's Law. He believed that every movement in the stock market could be broken into waves, smaller waves, and subwaves. Those waves explained every turning point and occasionally allowed him to make correct predictions.

Those analysts who sell advisory services based on Elliott's methods always come up with so-called "alternate counts." They explain everything in hindsight but are not reliable in dealing with the future.

Fibonacci numbers and their ratios, especially 1.618, 2.618, and 4.236 express many relationships in nature. As Trudi Garland writes in her lucid book Fascinating Fibonaccis, these numbers express the ratios between the diameters of neighboring spirals in a seashell and in a galaxy, the number of seeds in the adjacent rows of a sunflower, and so on. Elliott was the first to point out that these relationships also apply to the financial markets.

Tony Plummer describes in his book Forecasting Financial Markets how he uses Fibonacci ratios to decide how far a breakout from a trading range is likely to carry. He measures the height of a trading range, trades in the direction of a breakout, and then looks for reversal targets by multiplying the height of the range by Fibonacci numbers. Experienced traders combine

profit targets with other technical studies. They look for indicator signals at the projected turning points. If indicators diverge from a trend that is approaching a target, it reinforces the signal to get out. Trading on targets alone can be a tremendous ego boost, but the markets are too complex to be handled with a few simple numbers.

Setting Stops

Serious traders place stops the moment they enter a trade. As time passes, stops need to be adjusted to reduce the amount of money at risk and to protect a bigger chunk of profit. Stops should be moved only one way — in the direction of the trade. We all like to hope that a trade will succeed — and a stop is a piece of reality that prevents traders from hanging on to empty hope.

When you are long, you may keep your stops in place or raise them but never lower them. When you are short, you may keep your stops in place or lower them but never raise them. Cutting extra slack to a losing trade is a loser's game. If a trade is not working out, it shows that your analysis was flawed or the market has changed. Then it is time to run fast.

Serious traders use stops the way sailors use ratchets —to take out the slack in their sails. Losers who move stops away from the market vote in favor of fantasy and against reality.

Learning to place stops is like learning to drive defensively. Most of us learn the same techniques and we adjust them to fit our personal styles. The following are the basic rules for placing stops.

1. Stop-Loss Order

Place your stop the moment you enter a trade. Trading without a stop is like walking down Fifth Avenue in Manhattan without pants on. It can be done, I have seen people do it, but it is not worth the trouble. A stop will not protect you from a bad trading system; the best it can do is slow down the damage.

A stop-loss order limits your risk even though it does not always work. Sometimes prices gap through a stop. A stop is not a perfect tool but it is the best defensive tool we have.

When you go long, place your stop below the latest minor support level. When you go short, place a stop above the latest minor resistance (see Section 20). The Parabolic system (see Section 44) moves the stops in the direction of the trade, depending on the passage of time and changes in prices. If you use the Triple Screen trading system (see Section 43), place your stop after entering a trade at the extreme of the past two days' range.

Avoid all trades where a logical stop would expose more than 2 percent of your equity. This limit includes slippage and commissions.

2. Break-Even Order

The first few days in a trade are the hardest. You have done your homework, found a trade, and placed an order. It has been filled, and you placed a stop-loss order. There is not much else you can do —you are like a pilot strapped into his seat for takeoff. The engines are blasting at full power, but the speed is low, and there is no room to maneuver—just sit back and trust your system.

As soon as prices start to move in your favor, move your stop to a breakeven level. When the takeoff is completed, your flight is at a safer stage. Now you get to choose between keeping your money or gaining more, instead of choosing between a loss and a gain.

As a rule, prices have to move away from your entry point by more than the average daily range before you move your stop to a break-even level. It takes judgment and experience to know when to do it.

When you move a stop to a break-even level, you increase the risk of a whipsaw. Amateurs often kick themselves for "leaving money on the table." Many amateurs allow themselves only one entry into a trade. There is nothing wrong with re-entering a trade after getting stopped out. Professionals keep trying to get in until they get a good entry, using tight money management.

Protect — Profit Order

As prices continue to move in your favor, you have to protect your paper profits. Paper profit is real money — treat it with the same respect as money in your wallet. Risk only a portion of it, as the price of staying in the trade.

If you are a conservative trader, apply the 2 percent rule to your paper profits. This protect-profit order is a "money stop," protecting your equity.

Keep moving it in the direction of the trade so that no more than 2 percent of your growing equity is ever exposed.

More aggressive traders use the 50 percent rule. If you follow it, half the paper profit is yours and half belongs to the market. You can mark the highest high reached in a long trade or the lowest low reached in a short trade, and place your stop halfway between that point and your entry point. For example, if prices move 10 points in your favor, place a stop to protect 5 points of profit.

If in doubt, use the Parabolic system (see Section 44) to help you adjust your stops. When you are not sure whether to stay in a trade or not, take profits and re-evaluate the situation from the sidelines. There is nothing wrong with exiting and re-entering a trade. People think much more clearly when they have no money at risk.

After the Trade

A trade does not end when you close out your position. You must analyze it and learn from it. Many traders throw their confirmation slips into a folder and go looking for the next trade. They miss an essential part of growing to become a professional trader—review and self-analysis.

Have you identified a good trade? Which indicators were useful and which did not work? How good was your entry? Was the initial stop too far or too close? Why and by how much? Did you move your stop to a break­even level too early or too late? Were your protect-profit stops too loose or too tight? Did you recognize the signals to exit a trade? What should you have done differently? What did you feel at the various stages of the trade? This analysis is an antidote against emotional trading.

Ask yourself these and other questions and learn from your experiences. A cool, intelligent analysis does you more good than gloating about profits or wallowing in regrets.

Start keeping a "before and after" notebook. Whenever you enter a position, print out the current charts. Paste them on the left page of your notebook and jot down your main reasons for buying or shorting. Write down your plan for managing the trade.

When you exit, print the charts again and paste them on the right page of your notebook. Write down your reasons for exiting and list what you did right or wrong. You will have a pictorial record of your trades and thoughts. This notebook will help you learn from the past and discover blind spots in yyour thinking. Learn from history and profit from your experiences.

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