Using Trade Exits To Gain Maximum Profit

Exit strategies are an integral part of any trading system. Without an exit strategy, your trading is doomed to failure. All experienced and veteran emini future traders know what their exit will be before they enter any trade.

Exits are designed to attain the maximum amount of profit and giving little profit back once the profit is made on the trade.

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All trading systems should have different exit strategies designed into them depending on the current market situation. For example, the trader may have one exit designed explicitly for getting out of the market that do produce a small loss but there is a decrease in initial risk.

Other exits are designed to produce maximum profits. While some are utilized to keep the index futures trader from giving back too much profit. In this article we will cover a few of the exit strategies that can be designed into a trading system and how they can be utilized.

Market Timing

Market timing is most often implemented when the trader expects the market to move in the direction they think very quickly after execution upon entering the market. In this case, the trader may execute the exit before his stop-loss is hit reducing losses even further if the market does not go in the directions thought.

This type of exit is very often employed by people utilizing a scalp trading methodology. Scalp traders, as a rule, are usually only looking for a couple of points before they quickly exit the trade. Scalp traders may very often execute large numbers of trades throughout the daily session.

The Trailing Stop

One other very popular exit strategy used among traders is the trailing stop. The trailing stop is dynamic and fluid, moving along with the market after a trader enters a position. This type of exit is very often employed by day trading futures traders.

Day trading is generally defined as entering a position at some point during the market session and exit is executed at some point before the daily session ends or not long after the session closes in after market hours. However, some day traders may enter and exit positions several times during the day.

Trailing stops are an excellent strategy to use mostly if the market initially begins to move in the trader’s favor. Depending on the trading system used, as the market continues to move in the predicted direction, the trader will automatically move his stop above his original stop loss reducing the potential loss should the market reduce.

Trailing stops are not a guarantee of profit but do reduce the potential of larger losses that would be suffered if the original stop loss was hit. Remember, a trading system should first be designed with emphasis on money management, or protection of capital rather than profitability. Traders that learn this concept are very often the ones that live to become successful veteran traders.

The trailing stop has the ability to help the trader gain maximum profits but the trader should also understand, the trailing stop will also give back some profits since it is trailing, which of course means once you gain profit’s the stop will move up behind the trader’s position.

However once the market reaches exhaustion, the market will pull back and the stop will be hit thus giving back some profit. This is the nature of the trailing stop. It will not get the trade out at the top but will however produce profitable results in most cases if market direction is predicted accurately.

The Mental Exit

One of the most utilized exit strategies by trading market participants is the psychological or “mental” exit. The mental stop depends entirely on the trader and the trader’s interpretation of the market. This exit strategy should only be used by traders that have the discipline and experience to determine when the best time to exit as market conditions dictate.

Maximum profits are the goal. Calling a top is one of the most difficult parts of futures trading or any other form of trading and seldom will a trader execute an exit at the top. However, mental stops are an excellent choice to maximize profits.

The best trading system are designed with simplicity in mind. Rather than focusing on optimizing a index futures trading system, understanding and simplicity should be the main focus. Simplification of a system does not mean only one exit strategy can be used.

You as the trader can have multiple exit strategies and keep them simple to understand and follow. System that are intricate and difficult seldom work since the trader often becomes overwhelmed with the massive amount of information and signals produced by a over-optimized system. Simplistic systems work by allowing the trader to employ multiple exits and still meet their trading objective.

Scaling Out Exits

One exit that should not be avoided although very often employed by inexperienced traders is the scaling out exit. This form of exit requires the trader buy multiple contracts and scale out of them as the market move.

If the trader will take the time to analyze this exit, he would realize how much more profitable he would be if held the entire position and exited fully. The purpose of designing a trading system is to maximize profits and reduce the amount of major account draw downs and losses.

If the system is designed properly, scaling out of positions should not be necessary since the system will produce the best result with a full position. Inexperienced index futures traders very often employ this strategy falsely believing they are successful when they are really robbing themselves of maximizing profits.

Trading takes a considerable amount of dedication and discipline as well innate competitive spirit, no matter what financial market is chosen. Index futures is probably the most fluid and volatile of all the financial markets which requires a well designed system for the market participant to be profitable index futures trading.

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Set Ups And How To Incorporate Them Into A Index Futures Trading System

Trading requires the participant to be prepared for the coming market session and one of the criteria that must be met is trade set up considerations. Liquidity is very important, although the emini index futures market seldom has issues with liquidity during regular market session. However, the index futures are accessible twenty-four a day and liquidity is a concern in the after hours market. If a trader holds a position into the after hours market, unloading these contracts once the daily market has closed can become difficult. Liquidity should be considered if after market hours are chosen by the market participant to hold positions.

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Another important consideration is volatility. Depending on the chosen time frame, volatility or price movement is important before acting on a set up. Futures traders live for volatile markets. Enough market volatility is needed to make a profit, usually two to three times the trader’s initial risk.

Whether trading a pullback or entering a fast moving upward breakout, the trader needs to be aware of the dominant direction the market is moving. All financial markets move in three direction: up, down or sideways with the index futures markets being no different. Overall, markets usually trend down or up twenty percent of the time give or take a few percentage points and move sideways the remaining time. However, the day trading participant pays attention to the overall trend make makes his living trading entering both long and short positions within the prevailing trend.

Most players have trading systems that keep them in the market continually. But if you consider the sideways market as a condition of the overall market, then you probably need a trading system that keeps you out of the market at least seventy percent of the time. The person that is always holding a position in the market is going to spend a great deal of time in a sideways market which translates into many losing trades and many transactions cost, which makes your broker very happy. If this is the case, you should look at tweaking your trading system to avoid sideways markets. Sideways markets are very common during the New York lunch hours when floor traders break for lunch.

Set ups are criteria that must be met, according to your trading methodology, before ever executing and entering a position, either long or short. When this set up criteria is met, overall improvement of the trade becoming profitable are enhanced. Most index futures trading participants make a profit because the market moves a sufficient amount from where they entered the market. Although set ups are considered a criteria for a potential trade entry, the are better used as an event that must occur before the trader even considers opening a position.

Timing the market is also a very important consideration when utilizing trade set ups. Once the trader chosen the time frame in which to trade and understands the general market direction, he must wait until the actual move begins. If your trading systems alerts you to a possible trade set up, odds are the system will alert you before the move actually happens. Seasoned traders will use experience and market knowledge to keep from entering a position on the alert while inexperienced traders will enter once the alert is recognized. Experience brings patience and the experienced trader will only enter once the market move has begun. Improve your odds of success by confirming the market direction you are expecting before executing a trade.

Trading software is very important and almost all trading software will come packed with many different indicators and oscillators built into the package. Unfortunately, these oscillators and indicators give the inexperienced participant a false since of security. They will spend a few hours learning about individual indicators and oscillators and usually find these over-optimized system only lead to disaster. Too many indicators cause information over-load while trading systems that utilize one or two indicators such as moving averages or areas of support and resistance are much better. Simple systems using few indicators are the systems most often used by veteran traders.

Building a system that is tested and proven is how veteran traders become successful trading index futures. Focusing on how to locate trade setups and timing market entry are just one the keys to market success. I later articles, we will discuss different trade set ups and how they can be used to improve trade execution in both trade entry and trade exit. However, it should be noted, most newly minted traders focus too much on trade entry and less on exiting trades. Knowing when to sell, it has been argued with great success, is one of the most important factors in protecting trading capital and living to trade again. Trading systems that alert the trader to both entry and exit strategies that are simplistic in mechanics are by far the best emini trading systems

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Capital Preservation And The Importance Of Stops

People very often enter the index futures market using a new a set up technique or jump on board following the momentum crowd based on a event that has spurred the market, with very little consideration given to their exit strategy. Seasoned veterans who understand the market and emini trading, know well planned exit strategies are the key to making money. It’s been said many times by many experienced traders and is worth mentioning once more: Cut your losses short and let your profits run!

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Although this sage advice has been preached for untold years, people fail to follow this cornerstone rule of trading the financial markets. The point of the rule, you will never be profitable as an emini futures trader until losses are cut short and bad trades exited quickly. Much effort is put into learning and recognizing trade set-ups and how to enter the market with very little placed on how to exit both profitable and losing trades. The trader will only taste success once he learns to master exiting trades and money management, or in this case, capital preservation.

Almost all experienced futures players have a trading strategy they use to enter and exit the markets with this strategy being their trading system. A trading system is not complete or does not exist until the trader knows what his exit strategy is before he enters the trade. Once the market presents a possible trade set up, a index futures trader should know what his exit will be before he ever enters the position, long or short. Knowing how you are going to take profits and letting them run should also be known before entering the position as well.

Setting Your Stop Loss

When a trader determines where he will place his stop loss, he is determining one very important factor: The trader is drawing a line and setting the maximum amount he is willing to lose on the trade should it go against him. However, determining where to place stops increases with experience and a clear understanding of market dynamics. Many market participants routinely place there stop loss in areas of recent support or resistance. The problem with this stop loss trading strategy is, everyone else knows where these support and resistance levels are located since they can read a chart also. The index futures market will very often reverse and execute protective stop orders in these areas then slowly return to the former market trend, leaving frustrated traders in it’s wake. This is where market experience and knowing market dynamics comes into play. Using a trading strategy that is not so obvious as placing your stop loss in the easily recognizable support and resistance areas is one tactic the trader may use.

Tight stops are one tactic that is beneficial to the inexperienced  market participants since they lend themselves to micro-controlling losses by losing less money . By utilizing tight stops, the trader can make more than one attempt to capture a big market if previous attempts failed. By losing less money on prior broken trades, the trader has enough powder to attempt subsequent trades to capture the move. However, tight stops require many more trades that involve small losses. For the trader that cannot tolerate many losses, tight stops should not be used. Transaction cost or brokerage trade execution fees should also be considered since this methodology will increase these cost. Finding a inexpensive broker is a must for traders that utilize tight stops.

Using stops based the amount of money they are willing to lose on each trade is another popular stop loss methodology utilized by trading participants. The trade simply determines the amount he is willing lose should the trade turn sour. The largest benefit of this type of stop is it is only known by the trader himself. Since the stop is more then likely not placed in an area of recent support and resistance, the odds of the market reversing to take out stop orders is almost nonexistent. Other traders use moving average stops when trading mini-sized contracts. Moving average crossovers happen when a shorter line moving average crosses over the larger moving average line, Many traders will execute their stops when these lines intersect.
Not only does the trader exit at these intersections, he also may execute another position going in the opposite direction since the index futures market will very often reverse when these moving averages intersect and cross one another.

Stops are not unlike road sign and signals we see while driving our automobile. These signs alert us of impending change or that danger may be lurking. Stops do the same. Just as when driving, we sometimes disregard the road signs and continue on our present path. We may not experience any danger but we are not driving safely. If we allow our protection stops to pass without initiating a exit trade, we are being unsafe.

Stops only work as an emini strategy if we react when these physical or mental areas are reached. How much faith you have in your trading system will be determined if you yield to it’s parameters and are not ruled by human emotion - fear and greed. Index futures trading is a profitable vocation and professional seasoned traders make an excellent living by plying their vocation. However, they did not reach this level of professionalism by following their emotions. The got where they are by implementing a system, testing it and following it’s rules based on market dynamics.

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