Observation On Exits

Here is a quick TF trade of mine from Friday. It says a lot about the importance of exiting.

October 8 2010 TF Trade 1 Click Here

I had the premise and direction exactly correct as has been demonstrated in many of the preps I have posted in the past.

However, I took the same trade as this one on Thursday and produced a losing outcome due to my exit.

I held the trade past the retail exit area Thursday and got pushed out. I exited at the retail exit area on Friday with a scalp profit only to have the price continue up 100 ticks past my profitable exit.

In both cases, for the trade to continue, it required retail traders to come in and make the price continue in my direction. They could not do it Thursday and I lost. They did do it Friday and I appeared to leave a ton on the table.

The fact is that both had a winning wholesale opportunity that could be exploited but I only took advantage of one of them. It was not my entry that caused the outcome, it was my exit.

As for an important observation from me in the past 6 months, my best and most consistent trading outcome has come on the days when my exits are well before the price gets close to the full expectation of movement I have premised.

The vast majority of traders I have encountered are searching for the right tool or strategy to help them identify the correct area and direction to ENTER a trade.

Many resources available to a trader, even those few that are actually worth looking at, are focused on identifying a price to open a position. If action "A" happens then do action "B".

This is often a procedure that is developed by the designer looking at things that have happened in the past and expecting them to repeat.

The problem is that the market is an ongoing auction that is constantly trying to discover a price that everybody can agree on.

Thus, any expectation of an exact repeat of what happened in the past is going to lead a trader into a completely random situation that will often result in their money being taken by the market regardless if they had the correct entry area or not.

Even if a trader is a master at finding the correct areas of support and resistance, the way that the price reacts to that area will be different in each individual situation.

It is true that areas of support and resistance tend to hold upon an initial test. However, the manner in which the price respects the zone will be different each time.

For example, it may come in shallow of your support price and quickly reverse without allowing you to enter based on your strategy today.

Tomorrow, the price may push through your support price just far enough to sell to you at your entry price and then force you to sell back to the other side at a lower price once your strategy says it is not worth the risk.

This outcome of missing your winners and hitting your losers is exactly what the market is designed to do to the retail trader.

A trader should not expect that a fixed strategy such as an entry price based on a pattern, a stop amount and a profit target can overcome the efficiency at which more sophisticated traders can take their money.

The same goes for indicators and oscillators. These are ways of smoothing out the action based on hindsight. Anybody who has attempted to trade a strategy using a live account with these types of tools should be familiar with this concept.

These types of tools work great in theory and in simulated accounts yet completely break down virtually 100% of the time once a trader attempts to execute live.

The reason for this is because the market unfolds in a different way each time. It does repeat similar patterns but this is useless to the intraday trader who is taught to manage risk tightly.

The price is going to go exactly where the stops are. Your risk management is what is often providing liquidity for the market to discover.

I do not understand why so many experience this then move on to the next gimmick or fixed strategy expecting to get a different outcome.

There is a period of time that a strategy based on previous action can work but is inevitable that this will be rendered ineffective once the price starts behaving differently.

The key to successfully navigating the price action and being able to consistently win day in and day out is to be able to interact with the other players property, not to interact with the price and bars displayed on your screen.

You must separate the two. The price and bars are simply the footprint of what is happening, not the occurrence itself. Any strategy based of the footprint itself will require a trader to maintain such a high level of absolute rigid repeatability that few will ever be able to execute properly.

However, this is the preferred method many newer traders are lead to believe is the correct way to trade. This is myth often promoted by others who can not trade themselves.

It is the exit the determines whether you succeed or not. Your entry and even the direction of your entry is completely irrelevant when it comes to trading profitably intraday.

That exit includes the way your exit your losing trades. I believe it is far more relevant to your outcome to exit failed premises properly as opposed to exiting a profitable trade properly.

A trade at any price and in any direction can almost always have a losing or a winning outcome depending on how you exit. Many traders exit a winning trade with a loss.

Intraday trading is about exploiting short term inefficiencies. In order to do this, a trader must have an understanding of what game is being played by others.

Do you the sophisticated players care where the support or resistance is or what an indicator is doing? All they care about is how to trap you. There is no fixed strategy that can beat this.

In fact, many strategies often put a trader on the retail (losing) side of the market in almost every situation. If something can be averaged out or isolated based on previous action, it is a retail entry.

This can not interpreted any other way.

Many traders have struggled in the past couple months as the action has gotten more difficult. The few that have continued to trade well have developed an understanding through experience of how the trader on the other side of their trade behaves.

The market is very efficient and offers little edge. While certain areas can be mathematically verified to have a massive static edge, once you introduce a stop into this equation, the edge is dynamic as the trade unfolds.

For those few who know what to look for, there are constant opportunities to exploit the price. This game can be won with the correct understanding of the trader on the other side and it comes down solely to which party forces the other one out.

99% of retail traders trying to make it are not even playing the right game.