Thursday, 13 May 2010

Another Post About Exits

I have written about exits a few times and will do so again as I get lots of questions about what is probably the most critical part of trading.

A trader has control of only two things: when he enters and when he exits. Again repeating Pete Steidlemayer's words:" Just get the trade on and manage it", we need to have a comprehensive exit strategy as part of our trading plan.

When I put on a trade I have a vision of what the market is doing but I cannot know where it will go. All it needs is one or more large traders with an opposite view and my vision is history. I can probably see that the market will get to my first logical scale out point and after that, "I dunno" as they say in Oz.

I have accepted my limitations and have built my own workaround. I scale out. I take some profits all along the road. I know that it means that when i am wrong I will take a 100% hit and if it only gets to my first scale out point then I will have a 33% profit. But I have a high win rate. That is my protection and that is why the maths work for me.

A perfect example is trade #4 today. It was a buy because I was trading the Gap trade and the picture came together right at yesterday's VAL. wasn't difficult to trade. But then I had to manage it. My vision was a trade to the VAH. But my first logical scale point was 1167.50 and I took 1/3rd profit there even though I envisioned a trade to the VAH at 1169.50. I wasn't certain that it would go there. I was also ready to bail the whole position if the picture changed. If it had rocketed through the VAL then maybe I would still hold a piece until I thought it had run out of gas.

Exiting is all about the vision and the order flow and momentum as the vision unfolds. Making hard and fast rules is not the way I go. I am a discretionary trader and I use that discretion on the basis that I keep taking profits all along the way until I run out of bullets. Once I get that trade location, I don't want to just throw it away for 2 points.

 I'm writing this after watching the market get to 1169.00. I am out of 2/3rds and will look at what happens at yesterday's close of 1170.50 ish. EMAs are horizontal with trade on the correct side of them. Whatever else happens, I have a free trade now with my stop at break even plus a tick.

Price went through the VAH where I exited half of what I had left. I exited the balance at 1170.00 on the way back into the DVA.

That was a fairly typical way of managing a trade. the fact that it was a VAL to VAH trade made it easy to explain in writing, which is not always the case.


  1. Thanks a lot for a clarification, Tom. It seems that yours best trade of this day ( trade nr. 4 ) was a pure discretionary trade ( as i think price is back to VA and popped from the previous day VAL ). It is interesting does Kiki trade the trades like this? It is really difficult to put on the trade like this then everythink points down ( volume flow, cum volume, CCI is below zero ).

  2. Andreyyy, it was an outside in trade. Yes, Kiki is doing these now but I haven't showed much ourside in stuff on the blog as they are more difficult. Besides, at the VAL it didn't need much to put the trade on when the gap was open.

  3. Hi EL

    I have noticed lately that you have been saying "first logical scale point".

    It use to be the first scale was at 2 points. Have you changed your plan to meet market conditions?

    Thank you,


  4. Tom, still just confused a little bit with a entries. Have you ever considered to trade long yesterday at ~ 19.03 london time. Price breaked up emas ~ 18.00 retested emas ~ 19.00 then popped up with a volume concentrated in the upper part of the bar. CCI's suggested that there is continuation of the momentum. Long signal ~ 1168.75? If so, please suggest how to manage this trade, if you were not taken this one, please suggest why. Thanks!

  5. Anon, no change. 2 points is usual first scale out point but if the s or r is at 2.5 I use that. Whatever is logical around that area but minimum 2 points.
    Andreyyy. I had stopped trading but would have taken the trade and reversed on the 4th bar after that for 1.5 loss and then had an 8 point ride down. In fact, I was trading my retirement money and put on an ES option trade at around the 1165.00 area.

  6. Tom, and, please, last one question for today :). There is some known cumulative delta and volume studies, as a VSA, Wyckoff works and so on. As you surely know, markets moves because large players accumulates and distributes INVENTORY which is accumulated/distributed at certain levels. It's very difficult to track it, but some observations of cum delta could help. If you have traded for at least 5 years you are feeling this processes observing how price is capped or how the floor is placed under some level. For example, if you'll take a look on yesterdays cum delta we could observe obvious large distribution which have taken a place from a london morning near a ~1170 level. EVERY rally was capped and cum delta was falling even if price was rising. On these days i'm very cautious and don't trade long if i keep in mind that a distribution takes place. I keeped in mind yesterday, that there were VERY HIGH probability of the sudden fall at any moment with such a large shorts accumulated and that Goldman Sachs or JP Morgan wants to break this market to the downside. It was very difficult psychologically for me to take any long trade, when i see the situation like this. So here is a basic question - have you ever tryed to trade inventory, to observe these levels where large players does business; keeping in mind in which direction they want to drive the price and to trade just in this direction even if there is long signal as in my previous question near 1168.75 from the yesterday. Does any floor traders trade this thing? p.s. Today i see that even more shorts were accumulated and there is ~70% probability to get a sudden break to the ~1100 zone. Thanks for the insight valueble info you are providing to all of us!

  7. Andreyyy, you are trying to make this too hard and complicated. It's real easy. I just watch for order flow and momentum to change or continue. There is so much volume being traded for all sorts of reasons including both program trading and arbitrage that to try and firstly identify the type of trade and secondly what would shake it out, is too hard, and not required, at least by me. The more complicated you make it the harder it is to see the true order flow. I just trade what I see aand know when I have broken a major support it will likely go to the next one.