|
Jim
Wyckoff Discusses Entry & Exit Strategies
By
Jim Wyckoff
I
have received several email messages from my readers asking about
how to best determine entry and exit strategies when trading
markets. Here are just a few of their quotes:
-
"Though
my success rate has been high, I am only breaking even
financially, due to getting out too early in profit and letting
my losses run too far."
-
"Many
articles are written showing when and where to enter trades...
but how many articles are written about "running"
positions? Where to exit surely has to be the biggest key to
trading success!"
-
"I
would appreciate some advice or tips on how to and when to enter
a market and when to exit."
Of
course, if a trader knew exactly when to get into a market and when
to get out, wouldn't trading be easy! But even the most successful
traders in the world can't do that. The best they can strive for is
to catch a bigger part of any move (trend) in the market, and then
get out with a good profit before the market turns against them.
I've
written past articles on trading with the trend and not against it,
on the perils of trying to pick tops and bottoms, on support and
resistance, and on letting profits run and cutting losses short, as
well as trading the "breakouts." I won't repeat all those
trading tenets here, but if you've missed some of my articles, drop
me an email and I can attach some of them in an email to you.
In
this article, I'll get more specific on entries and exits, and what
to do if you are in a trade and are accumulating profits or
absorbing losses.
First
of all, if you are in a trade, you should already have a general
plan of action in place, including potential entry and exit points,
before you entered the trade. Certainly, you can alter your plan of
action in the heat of battle, but you should not enter any trade
without having a well-thought-out trading plan. Also in your trading
plan you can have a few scenarios that could occur and what you
would do if they did occur.
Entry
and exits points in trades most times should be based on some type
of support or resistance levels in a market. For example, in the
grain markets at present, many traders think prices are close to a
bottom. But I won't go long in a grain contract just because I think
it's close to a bottom. I need to see some strength in the market. I
will wait for the contract to push up through a resistance level and
begin a fledgling uptrend. Then, if I do go long, I'll set my sell
stop just below a support level that's not too far below the market.
And if the trend does not develop and the market turns back south,
I'm stopped out for a loss that's not too painful.
Another
way to enter a market that is trending (preferably just beginning to
trend) is to wait for a minor pullback in an uptrend or an upside
correction in a downtrend. Markets don't go straight up or straight
down, and there are minor corrections in a trend that offer good
entry points. The key is to try to determine if it is indeed just a
correction and not the end of the trend. In an earlier "Trading
Tip" article I mentioned using Fibonacci numbers to identify
potential "retracement" levels.
On
when to get out of a market when you're losing money, I have a
simple, yet very effective answer: Upon entering the trade, if you
place a sell stop below the market if you're long (buy stop if
you're short), you know right away how much money you will lose in
any given trade. You should never trade without employing stops.
Thus, you should never be in a trade and have a losing position and
not know where your exit point is going to be. I prefer setting
tighter stops because I'm not rich and want to survive financially
to trade another day. Yes, I'll get stopped out sometimes and then
right away the market will turn in the direction I had planned.
However, by setting tighter stops, I will not be in a position
whereby I lose substantial money because I'm fighting the market,
"hoping" it will soon turn in my favor.
What
about when you've got a winner going and good profits already in
place? This is the time to employ "trailing stops." For
example, if you're long a market and it reaches your initial upside
objective, but now you really think there may be more upside and you
don't want to exit your trade. You put in a sell stop at a certain
level below the market that allows you to stay in the winning trade.
But if the market turns south you are stopped out and still have a
decent profit.
I
can't tell traders exactly at what percentage below the market
(above the market if they are short) they should set stops or
trailing stops, because all markets are different at different
times, and traders have different views on how much money they can
stand to lose. However, a general rule of thumb is to place stops
and trailing stops just below a support level that's not too far
below the market. (If you're short, place the buy stops not too far
above the market.)
|
