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Exiting the Market
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POSITION LIQUIDATION AND PROFIT TAKING

In my trading method, I use several different ways to take profit and to liquidate profitable positions. The choice of one or the other in a real market situation depends on the current technical picture, presence or lack of trading signals, timing, market speed, amplitude and sequence of the pre­vious fluctuations, short- and medium-term trend direction, and such. It's absolutely impossible to describe each and every combination of different factors. Here, I will give you just a few general tips on how and when a profitable position can be squared and profit pocketed.

PROFIT-TAKING AT THE MOMENT YOU RECEIVE A SIGNAL TO OPEN A POSITION IN THE OPPOSITE DIRECTION

At first glance, such a way of trading may seem in general like the ideal one. This way seems like it would allow a trader to stay in the market for­ever by switching his positions from long to short ones, taking profits and losses, and every time reversing in the opposite direction. However, for a million obvious reasons, such a scenario is almost absolutely impossible, especially if trading on an intraday basis. Even if you exclude such factors as physical impossibility to control the market for the whole day, five days a week, and that more trades usually result in fewer profits, it still wouldn't be reasonable to try to catch every intraday fluctuation. For in- traday trading, for example, when a trader has to deal within a limited time frame and market space, a hit-and-run tactic might be considered as the most sufficient and effective. This tactic does not give traders an opportunity to switch from one position to the opposite one, without risking their floating proflt every time they wait for a signal to take proflt and open a position in the opposite direction.

The average daily range, even on the most volatile and active currencies, doesn't usually exceed 180 to 200 pips. Also, a lifetime of an intraday position rarely lasts more than several hours—and sometimes, even minutes. It is also obvious that in order to complete such a daily range and stay within it for a 24-hour period, the market has to fluctuate inside this range, going up and down through the same levels several times in one day. Thus, we can come to a conclusion that because the market most likely gives the opportunity to enter opposite positions at the same price level but at different moments of the day, a profit-taking tactic based on trading signals cannot be considered as too effective. Of course, there are some exceptions to the rule. I think that the tactics described earlier can be used in such cases as when, during the day, the market approaches major and long-term trendlines, supports, and resistances, and different formations' borders—all of which can be identified on longer-term charts starting with daily. In these cases, traders also have an opportunity not just to liquidate their profitable position, but also to open a new one at the same price but in the opposite direction.

This criterion can also be used as a signal to pocket your profits. Unfor­tunately, in practice it's not always possible to know exactly if the market activity decrease means that it is getting ready to turn in the opposite direction, or if the initial move will continue after some market hesitation and trading sideways. However, there are some signs that may help you to determine further market intentions. First of all, usually the turn doesn't happen at once. It usually takes some time to change the direction of the move to the opposite. Also, the market usually forms a sharp top or bottom (V-formation) when reaching a real extreme, even if this extreme is a local one and can be seen on an intraday basis. So if the market has formed a sharp top or a bottom and then is trading sideways after some correction, it might be a sign to think about pocketing your profits. If there is a flat surface formed on a very top or a very bottom of the range, then the market will most likely continue its move or at least make some extension in the same direction. See Figure 15.1.

To determine, for an intraday trade, whether the stop of the move is final or not, we should take a look at short-term charts—starting from 5 minutes and up to 15 minutes bar charts. If your position is having a floating profit at the moment and the last extreme has a flat end (top or bottom), then it would be better to wait a bit longer before taking a profit. If the market stops for long and doesn't make a new high (or low) within the period of time equal to that which it took to commit the move, then the position had better be liquidated and profit fixed. This criterion is very simple to apply to real trading. All you need is to count a number of bars on 5-minute intraday charts. If the number of bars after the market formed its last extreme equals or exceeds the number of bars that formed the last wave, then it's time to get out. See Figure 15.2.

FIGURE 15.2 The number of bars at high are 6. Number of bars after the market formed its last extreme is 4. Time to get out and take profit.

PROFIT-TAKING BASED ON TIMING

This is one of the most simple and reasonable ways to pocket a profit be­cause the market has its own specific cycles of activity. These cycles are changing from time to time, but it's easy to identify a particular one after some watching. Some of those cycles can sometimes be identified on the basis that the market makes extremes at certain periods of time of the day. If such a pattern is seen and proven, then it gives a trader, not just an opportunity to liquidate his position at nearly the best price, but also to take another position in the opposite direction.

The other choice related to timing would be pocketing profit at a cer­tain moment—for example, 30 to 40 minutes before the end of the European session. The profit taking may start when the correction against the main move of the day will begin, or at the very end of a trading day before the closing of the New York session.

PROFIT-TAKING BASED ON AMPLITUDE OF A DAY RANGE

This one should also work pretty well and (at least statistically) makes a lot of sense. By calculating the average day range for the last couple of months (for example), we can easily make a projection for any current day in terms of its possible range. So, the position might be liquidated and profit taken if the market has already reached its average day limits and fully completed its daily task. Such an approach is usually good when a position was taken after the market has already formed some intraday range and the timing (in regards to cyclical changes) is also taken into consideration.

So we have a variety of different approaches to profitable position liquidation, but it is also important to remember that the time frame for each trade should be planned (even roughly) in advance. It would be better to follow the initial plan from the very beginning to the very end, unless some dramatic market changes call for its review and reconsideration.

EXITING A POSITION WITH A SIMULTANEOUS REVERSE

Position liquidation with simultaneous opening of a new one in the oppo­site direction is a method that I apply frequently. In most cases, I apply it at the moment of liquidation of an unprofitable position, but there are cases in which the reverse occurs at liquidation of a position with profit. Between these two cases, there is a basic difference, and it makes sense to consider each of them separately.

Simultaneously Reverse and Liquidate an Unprofitable Position

Simultaneously opening a new position in the opposite direction and liquidating a previous one is a quite normal and natural action for me. Why not? Things went wrong—not as I was hoping in the beginning while making my trading plan. The market has to go somewhere and there are just two possible directions for that. So I don't hesitate. I had better take a position where the market goes, instead of sitting and doing nothing after the stops were triggered. Because I try not to have an opinion about future market behavior and its direction, I do not feel any stress in relation to liquidation of one position and opening the opposite one. Really, why should I worry if there is a confirmation that the market is choosing the opposite direction and it is possible to earn money trading either way? By receiving confirmation that the market is not going to follow in a direction originally selected in accordance with my initial plan, it would be quite logical to try to achieve success by reversing a position. In such cases, the new position usually opens automatically at the moment the stops trigger. My only concern is that such an action always has to be part of the initial trading plan. Like the rules of stops placing that we discussed, opening a new position at reverse also has to be carried out using similar tactics. However, in order to make a decision to reverse a position, there should be some certain terms and preconditions met to avoid possible problems and complications. There are also some times when the reverse is not recommended be­cause it can be too risky.

The presence of the following factors will favor position reverse, if they occur at the moment of reverse:

•  The market breaks a major technical level, which can be determined
at the analysis of intermediate- and long-term charts.

•  There is an opportunity to place tight stops, and the risk taken doesn't
exceed a safe level in case of possible loss.

•  The market is active and its speed is high.

•  The intraday range is broadening.

•  There is an expressed intermediate-term trend in the direction of the
newly open position.

The reverse of a position can appear inexpedient and risky if:

•  Activity of the market and its speed are rather low.

•  The reversed position will be open against the main direction of the day.

•  The new position will be directed against the intermediate trend.

•  There are less than two hours before the end of a trading day.

•  The market has already formed or exceeded its average daily amplitude.

•  The point of reverse is not tied to any significant technical level.

•  The nearest technical level suitable for placing stops is too far from it
and is outside an acceptable range.

These common reasons are not rigid rules, and the decision should be made with regard to the particular situation. Some preliminary analysis and consideration of several possible variations should also be done. In any case, the decision to reverse a position should be made in advance and be part of the whole trading plan from the time the initial position was opened. The reverse is best when you place the stop that will be activated at the same price at which the initial position was liquidated.

Contract Size Increase (Doubling) for a Reversed Position

I apply this method rarely, though it is known that many traders use it widely. It seems to me that, in many cases, there is no practical expediency in such an action. Rather, the incentive is elementary greed, the desire to recoup and to cover losses as soon as possible. More so, increasing contract size is related to psychology rather than to a trader's everyday routine (only in a case when such a practice is not part of a mechanical trading system used by a trader). I think that mistakes or lack of professionalism should not be corrected at the expense of such purely mechani­cal actions as a contract size increase at the moment of position reversal, because the risk also increases accordingly.

When several consecutive losses during the same trading session oc­cur (for example, a choppy market situation took place), increasing con­tract size can result in severe damage to the trading account. Therefore, I apply a double contract size at a position reverse only when there is an opportunity to place a very tight stop. More often, I liquidate the surplus in the contract size as soon as the profit covers the initial loss. Besides, I prefer to double a contract size after two consecutive losses only. If a third one happens this time, I stop trading until the next day, when new trading opportunities and signals will be generated.

Reverse at the Moment of Liquidation of the Previous Profitable Position

I use this scheme rarely, but more often than I apply the technique of doubling the contract size. I use it seldom, not because I do not like such an approach, but because such a method requires great accuracy, attention, and certain conditions that need to develop in the market. Unfortunately, in practice, the conditions for this kind of trade are rare, especially for in- traday trading.

The reverse with simultaneous liquidation of a profitable position is possible under two circumstances:

•  The market reaches a strong technical level that it is unlikely to pass.

•  The market gives a signal for opening a position in the opposite
direction.

In both cases, a trade execution can be made directly by a trader through a market order, whether he looks after the market at this moment or it is done automatically. The automatic order occurs when an old posi­tion is liquidated through a limit order at the level calculated in advance, that is, directly ahead of strong technical support or resistance. A new position then opens simultaneously by the same order. Externally, it looks like an ordinary limit order but twice the size of the initial contract. In both variations, stops on a new position should be placed beforehand, too.

In the second case, for liquidation of one position and the opening of another position, a trailing stop can also be used along with the doubling size of the usual contract. After an order execution, a new position should be protected immediately by automatic stops.

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