Few new traders realise the importance of exit strategies when designing/trading a system. Afterall, without exits, how would one get profits? If you want to maximise profits your exit strategy is as important, if not more so, than your entry.

The well sung axiom of let your profits run and cut short your losses is essential in winning in trading given that trading is a game of probibilities. You have to look at the bigger picture to win, i.e you have to lose to win and if you don't lose well you will not win. If you take 100 trades and 90 of those trades are losses but your 10 winners are larger than your overall losses then you have your losses smaller than your winners which is the ultimate aim of trading. Exits are therefore vitally important whatever winning % of your system. It can be big or small but its your exits that determine if you win or lose.

Whilst many traders don't even register the importance of their exit strategy in their system, many other traders tend to scale out their winners in order to lock in profits. However, This type of exit is one in which you enter the market with multiple contracts and then scale out with various exits. But if you step back from this sort of exit and really study it, you’ll see how dangerous this type of trading is. What you are actually doing with this sort of exit is practicing reverse position sizing. You are making sure that you will have multiple positions when you take your largest losses. You are also making sure that you only have a minimal-sized position when you make your largest gain. It’s the perfect method for people with a strong bias to be right, but it doesn’t optimize profits or even guarantee profits over the long term as you are not maximising profits over your losses.

The well sung axiom of let your profits run and cut short your losses is essential in winning in trading given that trading is a game of probibilities. You have to look at the bigger picture to win, i.e you have to lose to win and if you don't lose well you will not win. If you take 100 trades and 90 of those trades are losses but your 10 winners are larger than your overall losses then you have your losses smaller than your winners which is the ultimate aim of trading. Exits are therefore vitally important whatever winning % of your system. It can be big or small but its your exits that determine if you win or lose.

Whilst many traders don't even register the importance of their exit strategy in their system, many other traders tend to scale out their winners in order to lock in profits. However, This type of exit is one in which you enter the market with multiple contracts and then scale out with various exits. But if you step back from this sort of exit and really study it, you’ll see how dangerous this type of trading is. What you are actually doing with this sort of exit is practicing reverse position sizing. You are making sure that you will have multiple positions when you take your largest losses. You are also making sure that you only have a minimal-sized position when you make your largest gain. It’s the perfect method for people with a strong bias to be right, but it doesn’t optimize profits or even guarantee profits over the long term as you are not maximising profits over your losses.

If you analyse your system with some back-testing or look at past real-time trades determine whether scaling out of positions is really the right thing to do over the long term for your system.

Would like to hear your thoughts...