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Here is an exit strategy that is purely mechanical in nature and easy
to follow and for the most part works pretty well. But, these rules are
only as good as the person's ability to stick to them in all cases.
These mechanical rules do 5 things for you:
1) Set initial risk based on recent market activity
2) If the trade is correct, it gets to breakeven quickly and thus
keeps losses to a minimum if the market should then turn
against the trade
3) It allow for the trend to run and protects profits as the
trend runs, but stays far enough behind to not get stopped out
on a retracement bounce in the opposite direction of the trade
4) It trails the stop/loss up or down (depending on whether the
trade is long or short) to protect profits
5) Gets out of the trade quickly and completely, if the market
suddenly turns against the trade after the trade is underway.
Here are the mechanical rules:
1) If your entry rules indicate that a "LONG" trade should be initiated
tomorrow, then:
a) Set the initial stop/loss to the low of 3 days ago.
b) If the trade goes 2 days in a row in a profitable direction,
then move the stop/loss to the same value as the entry value
.....breakeven in other words.
c) If the trade has managed to move the stop to breakeven, then
after 3 more positive profit days in a row, move the stop/loss
to the low of 3 days ago from today. In other words move the
stop up to trail and protect profits. If the trade get 3
more positive profit days in a row again, then move the
stop/loss to the low 3 days ago from today again. And so on
trailing the stop/loss upwards in this fashion. But never set
the stop below the entry, after moving it to breakeven.
d) If on any day the 4 day simple moving average of the close
crosses below the 9 day simple moving average of the close,
exit the trade the next day at the open....no questions asked.
2) If your entry rules indicate that a "SHORT" trade should be initiated
tomorrow, then:
a) Set the initial stop/loss to the high of 3 days ago.
b) If the trade goes 2 days in a row in a profitable direction,
then move the stop/loss to the same value as the entry value
.....breakeven in other words.
c) If the trade has managed to move the stop to breakeven, then
after 3 more positive profit days in a row, move the stop/loss
to the high of 3 days ago from today. In other words move the
stop down to trail and protect profits. If the trade get 3
more positive profit days in a row again, then move the
stop/loss to the high 3 days ago from today again. And so on
trailing the stop/loss downwards in this fashion. But never set
the stop above the entry, after moving it to breakeven.
d) If on any day the 4 day simple moving average of the close
crosses above the 9 day simple moving average of the close,
exit the trade the next day at the open....no questions asked.
That's it. Pretty simple.
Later,
Keith
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