Determining Exit Points
Determining Exit Points
The easiest way to determine how much risk there is in a trade is to determine the exit point before the position entered. There are two easy ways of determining this price level.
Firstly a lot of traders use a trading method based on Technical analysis that will provide a reversal signal or stop loss price for you. Let’s take the most basic of example shown in the chart below. Here we are trading Barclays (BARC) and the green arrow denotes where we are looking at buying. The technical indicator used is just a simple 8 day moving average. Now we know our technical stop will be when BARC crosses back through the moving average we have designated. Our stop therefore should follow this moving average and as denoted on the chart as it crosses back through the 8 day moving average our stop loss triggered and our position exited.
The second is when you are not reliant on a fundamental or technical point but a point when you as a trader decide to draw a line in the market, admit the trade was bad, and no longer allow the market to take anymore of your capital. Either way it is vital that exit points are determined prior to entering any position. In this case a trader might be willing to only lose $100 on a bad trade. In this case we have to work out the distance our position can go against us before the $100 loss is reached and set our stop loss there. As an example if we held 100 XYZ CFDs at $10.00 then we know that our stop loss will be when XYZ reaches $9.00 as this will be a $100 loss.
One of the most important decisions made by a trader is determining your exit point before entering the position.
Finding Capital Exit Points
Determining how much you are willing to risk on each trade relative to your entire capital/portfolio is not easy and comes down to the individual and their current situation. Keeping in mind every single trader is different, has different levels of capital and trades for different purposes expecting different outcomes. For example many top traders will limit this amount to less than 2% of their stake. Having read a lot of literature and attended a lot of trading seminars throughout my trading life this 2% rule of thumb seems to be quite popular but can be adjusted based on each individual trader. One main reason traders keep this figure relatively small is because in the event of a long series of losses they can still preserve capital and not get to a point of ruin. First and foremost when trading, especially starting out or trying new strategies, as capital preservation is more important than capital appreciation because with no capital there is no trading.
It is imperative everybody understands that losing trades are a part of life and unavoidable, everybody has them. The key is to limit those losses so that you can endure a string of them and still have the capital to place more trades to get the winners. By having your exit points as a percentage of your capital it will always help adjust what you willing to lose based on an increasing or decreasing capital base.